…can Eurobonds save us?

Source: Janine Bernsdorf¸ PKF Malta¸ 29th February 2012

Many economists argue that the massive debts accumulated across a medley of EU members cannot be repaid within a short timeframe without the assistance of longer term solution afforded by the issue of Eurobonds. This has been so far resisted by the German chancellor and as we shall see in this article there are also valid reasons for such a stiff resistance to change. The patient is not only injected with painful drugs to heal the symptoms of the past profligacy and made to suffer many deprivations but on top of it he/she is expected to get up soon and start producing so as to revive the stagnant Greek economy (last year suffered a 7% contraction). Having seen the approval of a massive bailout to Greece approved this week by the finance ministers one cannot but sympathise with the poor Athenians who have to bear the cross for past sins of their masters. Yet there is some consolation that the idea of issuing Eurobonds seems to be gathering flavour among the EU community. It is encouraging to note that the EU Commission will be supported by a few by their insistence on Eurobonds. The European Parliament urges the Commission to promote the “stability of bonds”. According to a resolution which was adopted by the EU Parliament in Strasbourg last week the instrument was a “long-term strategic interest” of the euro countries¸ in order that the Euro could become a world reserve currency. [1] “The prospect of stability bonds can foster stability in the euro area in the medium term¸” the 754-seat Parliament said in the resolution approved last week. [2] The assembly said it is “deeply concerned at the continuous strains on the euro-area sovereign-bond markets reflected in widening spreads¸ high volatility and vulnerability to speculative attacks over the last two years.”[2] It comes as no surprise that delegates face the acute financial market uncertainty and want to prevent such uncertainties in the future. They argue that a common bond market could be “a viable alternative to the market for U.S. dollar bonds offer and turn the Euro into an international safe currency¸” says the text. [1] Admittedly the euro zone countries suffer from a dichotomy that is a common currency but neither a common fiscal policy nor a common bond market and this fact had led to speculative attacks in the past two years. It is opportune to recall how the financial expert of the Green Party¸ German Sven Giegold¸ praised the introduction of such instruments stating “that the stability of the euro takes precedence over the satisfaction of national self-interest.” [1] It is a pity that¸ the German Chancellor Angela Merkel is still against the Eurobonds. The reason why Germany opposes vehemently is obvious. Such bonds would be unpopular with voters and would impose additional risks to the public treasury. Furthermore the German economy is one of the last survivals in the Euro zone (apart from UK) that is retaining its top triple A rating branded by the rating agencies. Such a higher grade brings in advantages of historically low interest rates when Germany borrows from the market. In addition¸ the economy itself is bursting with energy. This contrasts to a completely different assessment of the situation when measured with the battered or crippled countries of the euro zone. The m