How Eurobonds May Save Europe

European leaders have two major economic efforts on their hands: controlling the massive debt levels of eurozone nations and saving the euro itself.  Both efforts are critical to Europe’s long-term path towards stability. Meanwhile growth in several key economies continues to slow down, threatening the very vitality of the currency.  The German economy, for example, only grew 0.1% the last quarter.

On Tuesday, German Chancellor Angela Merkel and French President Nicolas Sarkozy met to work on solutions.  BBC News reports they want bi-annual meetings of eurozone officials, tax increases on financial transactions to help bring in more money, and an overall tighter fiscal policy.  That was not enough to satisfy investors in the world markets. Stocks took a dive not long after the announcement.  The investors wanted a bigger bang.  That could have happened if the leaders voiced support for something like eurobonds.

The Benefits
Supporters say introducing eurobonds would provide one financial standard to buy up the un-even levels of debt between member nations.

“The hope is that a shared debt security could help lower the borrowing costs for the debt-laden PIIGS nations of Portugal, Ireland, Italy, Spain and Greece,” wrote CNN Money’s Paul R. La Monica.

Essentially, it would extend the idea of financial unification across Europe.  The money raised from the bonds would help pay the debt of the participating nations.  Experts say it would help lower their cost of borrowing, saving them money.

The Risks
The downside is that interest rate factors could help some nations while harming others at the same time.  La Monica writes that low bond interest rates could benefit the higher risk nations with loads of debt but may cause rates to skyrocket for the more financially responsible governments.  That would be bad for those respective economies.

Another problem is the free-rider climate.  Wall Street Journal writer Marcus Walker explained that eurobonds would reduce market-driven persuasion on governments to limit their spending risks.

“The main objection to euro-bonds is that they would remove financial-market pressure on national governments to curb deficit spending. Peer pressure among European governments has a history of failure.  Free-riding by profligate countries could turn the whole euro zone into an entity more like Greece than Germany,” he wrote.

Germany’s Chancellor Merkel downplayed calls for eurobonds at Tuesday’s meeting.  Reports say she feels it could only happen after other changes are made.  She, like others are proposing balanced budget requirements for eurozone nations.  That idea has potential, since debt concerns also include the prospects of future spending (or waste) on top of the current debt levels.

In that respect the eurobond would help keep the ship afloat, but won’t do much to plug the hole, allowing more water (i.e. debt) to pour in.  Perhaps this crisis will remind debt ridden nations that their fate has a collective impact on Europe as a whole.  In many ways, they are in all of this together.

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