Europe debt crisis raises pressure for radical fix
FRANKFURT, Germany — As a week of market turmoil ended Friday, an increasing number of economists and policymakers were calling for an unprecedented solution to combat Europe's debt crisis: a new joint bond backed by all countries using the euro.
Eurobonds would be a dramatic step toward the economic integration of the European Union, and are billed by supporters as an overnight solution to the crisis.
But the idea is being strongly resisted by Germany, which as the most credit-worthy European country fears it would face higher borrowing costs and more risks if it had to borrow jointly with financially shaky nations.
This week's stock market plunges and rising fears about previously immune economies such as Italy and France created new momentum behind the idea.
British Treasury chief George Osborne, whose country is not in the eurozone but trades extensively with it, called Thursday for serious consideration of eurobonds. Billionaire investor George Soros joined the eurobonds chorus on Friday, saying that Germany and other financially solid countries "must agree on a eurobond regime, however defined. Otherwise the euro will collapse."
Along with German objections, proposals for eurobonds face economic and legal hurdles. Opponents say it would run afoul of a caluse in the treaty governing the European Union that forbids it from assuming responsibility for countries' debts.
They charge that despite numerous proposed safeguards such as strict debt limits or parliamentary scrutiny, eurobonds could not prevent shaky countries from riding for free on the credit of solid ones.
Eurobond supporters say those concerns are outweighed by worries that a euro440 billion euro bailout fund — big enough to rescue small countries such as Greece, Portugal and Ireland — would need more money to save Italy or Spain. That could strain the finances of contributor countries German and France.
Those supporters now include Belgian Finance Minister Didier Reynders, German Social Democratic opposition leader Sigmar Gabriel, Italian Finance Minister Guilio Tremonti, and Luxembourg Prime Minister Jean-Claude Juncker, who heads the eurozone's finance ministers' group.
The European Commission, the EU's executive body, is studying the feasibility of eurobonds at the request of the European Parliament, although given opposition from Germany it is unlikely to be put forward as a solution when German Chancellor Angela Merkel and French President Nicolas Sarkozy meet in Paris over the crisis on Tuesday.
The basic principle behind eurobonds is that European countries would guarantee each other's debts, so that investors would see the bonds as super-safe and loan at low interest rates. That would prevent individual countries from being hit with market fears of default, and then with the unaffordable interest rates that have driven Greece, Ireland, and Portugal to seek bailouts from the eurozone countries and the International Monetary Fund.
Eurobonds would "solve the problems we have right now overnight," argues German economist Peter Bofinger, member of an economic council that advises the German government.
"As soon as countries like Italy or Greece and Portugal can issue eurobonds, they can always get the money they need from the markets and they will get it at low rates," said Bofinger. "And so the risk that the country becomes insolvent and that German taxpayers have to guarantee Italian or Irish bonds goes to zero."
The key, even supporters say, is finding a safeguard against one country getting in trouble and simply dumping its debts on the others, or simply enjoying low interest rates at the group's expense while spending too much.
Economists Jakob von Weizsaecker and Jacques Depla, writing for the Brussels-based Breugel think tank, propose limiting the temptations to excessive borrowing by capping eurobond issuance at 60 percent of a country's debt — the same limit imposed by the Maastricht Treaty for countries joining the euro.
Those "blue bonds" would be guaranteed, while countries could still issue "red bonds" that they would be responsible for themselves. Since red bonds would carry higher risk and higher interest, they would discourage excessive borrowing and help enforce the euro's rules against excessive debt.
The ultra-safe, abundantly available bonds would be attractive as central bank reserves and bolster the euro's role as an international currency, the thinking goes.
Economist Bofinger said the crisis might force the German government to change its mind. "The EFSF is also not something that was envisaged by the treaty."
"But in the crisis so far we have seen that there are always things that the German government regarded as awful and nevertheless they did it. It's a story of refusal and then acceptance. Our interest is in preventing the blowup of the eurozone."