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While support for intervention by the European Central Bank to fix the eurozone crisis has never been stronger, serious doubts remain about the likelihood that such intervention would actually fix the euro or that Germans would be likely to approve it.And while the media may remain fixated on the ECB, the real issue gaining steam is actually eurobonds.
Chatter about joint euro area sovereign bonds surfaced in August, and lost momentum after EU leaders said that such a plan wasn’t imminent back in September.
Fast forward two months and that’s a very different story. The European Commission has produced and is about to present a report on the feasibility of a eurobond, and the German Council of Economic Experts is unanimously endorsing a plan to make common euro area bonds a reality, prior to more thorough fiscal integration.
Here’s how the German plan would work:
– Immediately, countries with sovereign debt over 60% of GDP will be able to jointly finance the debt exceeding this level via a proposed European Redemption Fund.
– Joining the fund would require acceptance of certain automatic tax and spending restrictions and would require the country to put down 20% of its borrowing in gold or foreign exchange collateral.
– If all eurozone countries participated, the fund would amount to €2.7 trillion ($3.6 trillion), with German and Italian debts amounting to 25% and 40% of the fund, respectively.
– EZ countries would sign a European Redemption Pact, outlining how they will lower their gross public debt to 60% of GDP over the next 20 years. After that point, the pact would expire.
– More details can be found in an editorial written by the Council in VoxEU.
While the Council says that the plan would require “extraordinary efforts” from all participants, such a plan would not necessitate treaty changes immediately and bolster confidence in Europe in the expectation that further fiscal integration will be forthcoming.
Most importantly, the European Redemption Fund would permit all euro nations to assume the debts of others. This would probably be successful in reassuring borrowers that countries like Italy are actually going to be able to repay their debts.
If such a plan is truly amenable to German leadership, there is a high likelihood that we could see it enacted. True, it’s not an ultimate solution to problems in the eurozone, but instead of “kicking the can down the road,” such a development could amount to picking up the can and walking towards the recycling bin.