Could Eurobonds be the answer to the Eurozone crisis?Veröffentlicht: 27. Juni 2012
Could Eurobonds be the answer to the Eurozone crisis?
Jeffrey Frankel, 27 Jun 2012
Solutions to the Eurozone crisis must balance the evils of austerity and moral hazard. This column argues that the blue/red Eurobonds proposal might just get this balance right.
Any solution to the Eurozone crisis must meet two objectives. One is short run and the other is long run. Unfortunately they tend to conflict.
The first necessary objective is to put Greece, Portugal, and other troubled countries back on a sustainable debt path, defined as a long-term trajectory where the ratio of debt-to-GDP is declining rather than rising. Austerity won’t restore debt sustainability. It has raised debt-to-GDP ratios, not lowered them. A write-down would do it. New bigger bail-outs might too, or might not. But write-downs or bailouts would then create moral hazard and thus make even it even harder to satisfy the second necessary objective.
Germany opposes Eurobonds on the sensible grounds that if individual national governments were allowed to issue them freely, the knowledge that somebody else was paying the bill would make the incentive for member countries to spend beyond their means worse than ever. This version of Eurobonds would be bound to fail, both economically and politically. This seems to be the version that some opponents of austerity have in mind, such as the new French president, François Hollande, though it is hard to tell.
Hope by some Europeans that the Fiscal Compact would finally make enforcement credible by writing the constraints into the constitutions of member states might be based on misunderstanding of the US system (Henning and Kessler 2012). One can see the logic: The US federal government has never bailed out one of the 50 states and nobody expects it to do so in the future. How has the US solved the problem of moral hazard that so plagues the Eurozone? The states have rules to limit deficit spending (well, 49 of them do; these laws are voluntary on the part of the states, and Vermont does not have one) (Poterba and Rueben 2001). That must be the answer!