The European Commission is expected to publish a report outlining the feasibility of three proposals for common euro area bonds tomorrow, and everyone’s chattering about whether any of these ideas will work.
WSJ is reporting the details of these three different plans. Here’s a summary of what they include:
1) All debt is converted to eurobonds, for which the 17 euro countries would provide joint (shared) and several (split-up) guarantees on their debts. This would entail a lot of moral hazard for countries with unsustainable spending habits, but would have a very positive market outcome. It would mark an important step on the road to fiscal integration, but probably require treaty changes and so take time to implement.
2) Some debt is converted into eurobonds, with both joint and several guarantees. Such a plan would entail less moral hazard but temper market reaction because not all debts would be guaranteed. This might, however, maintain incentives for more austerity and fiscal discipline. This would also be a step towards fiscal integration and would still probably require treaty change, so it is seen as a medium- rather than a short-term solution.
3) Some debt would be converted into eurobonds, and supported only by several (not joint) guarantees with “enhancements.” Those enhancements would likely dictate the market impact since not all debts would be guaranteed, but it is a solution that could be implemented in the short term. It would not substantially change the nature of euro area fiscal integration.
It seems clear that the third solution is the “kick the can down the road” option, while numbers one and two could assuage long-term cracks in the euro structure. As is to be expected, the latter solutions would likely take longer to implement.
Option #2 mirrors a proposal put forth by the German Council of Economic Experts earlier this month, which would allow countries to raise financing through joint eurobonds only if they submitted to stringent, automatic fiscal regulations.
The debate over eurobonds is heating up, and we’ll be covering more on all these different plans as EU leaders start discussing them.