Suffice to say, the options presented by the Commission (option 2 in particular) are very similar to those which we based our assessment on and therefore, we believe, that many of these points ring true for the Commission's plans. See below for our thoughts (with a focus on partial eurobonds):
- The key issue with partial Eurobonds is the implementation. A staggered introduction would have minimal impact in terms of reducing refinancing costs and would offer little help to already insolvent states. There is also yet to be a fully credible plan for how to integrate existing debt markets and debt burdens under this scenario – it is likely they would become incredibly volatile. An outright swap would be impossible to structure with partial Eurobonds, as determining which debt became euro guarantee and which stayed nationally guaranteed would be nearly impossible. This could require a huge debt restructuring, including larger nations, which the eurozone or global economy could not handle.
- In many proposals involving partial Eurobonds, there is an emphasis on making the remaining national debt costly and undesirable, usually in an attempt to maintain fiscal discipline. However, this often goes too far, meaning the higher cost of borrowing for national debt may outweigh the benefits of lower cost Eurobonds. Again given the existing level of debt in the eurozone, many countries would immediately hit the threshold for Eurobond debt, meaning they were still reliant on national debt for financing. Therefore, the new structure would offer little benefit.
- Additionally, given the problems of implementation and remaining national debt, it’s likely that a sizeable eurozone bailout fund would still be required, not least because the eurozone would still lack a credible lender of last resort. Given the joint debt guarantee this fund would also need to include some form of euro-wide deposit insurance and bank guarantee scheme (since states’ fiscal manoeuvrability would now be limited in a crisis). Furthermore, the additional guarantees offered by core countries under partial Eurobonds, could threaten some of their credit ratings, which would undermine the whole framework.
- There are also huge political constraints, even with partial Eurobonds. Any country issuing sizeable guarantees, even under partial Eurobonds, will expect some control over the budgets which they will be backstopping. The divisions already arising in the eurozone over the implementation of bailout conditions show that such an arrangement is extremely difficult to sell to national electorates. Even if Eurobonds were administered and controlled centrally, the EU’s history of politicising supposedly independent institutions suggests this approach may not be successful. Most importantly though, given these concerns, without full democratic backing it is unlikely that any Eurobond proposal could ever be durable or stable over the long run, not to mention desirable.
- Overall, it seems that the only really economically sustainable method for introducing debt mutualisation in the eurozone would be through full Eurobonds. However, as the previous point suggests this would be politically impossible in the near future. Not only would it require a lengthy public debate on the issues, there would a substantial revision of the EU treaties (though it could possibly be achieved through a separate eurozone Treaty) in addition to a series of conditional referenda to ensure widespread democratic backing. Eurozone electorates are still a long way from providing this.