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BackCommission President Barroso and the recently appointed Mr Euro, Commissioner Rehn used this occasion to open a public consultation, which should provide an answer to the question whether issuing a common European Government Bond would be feasible. However, both Barroso and Rehn regard such common European Bonds only as part of the package. In particular the tighter budgetary and economic supervision of the Member States of the Eurozone would have priority. A two-speed Europe is becoming increasingly more likely. Barroso said that tightening supervision was necessary because the EU Member States had lived beyond their means. A serious misconception, which puts the blame of the misery caused by the debt crisis not on the rogue financial markets, but on the citizens of the EU, who allegedly had not saved enough. Euro Stability Bonds would have a significant market value
The Green Paper shows that the market value of the Eurobonds issued by the 17 Euro countries would amount to ca. EUR 7,822 trillion or 84 % of the GDP. In comparison, US Treasury Bonds are worth EUR 10,3 trillion or 94.4 % of the GDP. The yields for the 10-year Government Bonds of the 17 Euro countries are vastly different: 1.8 % for Germany and 11.6 % and 27.8 % for Portugal and Greece respectively. The introduction of Stability Bonds or “Eurobonds”, could put an end to such differences. However, countries such as Germany that so far enjoyed a very favourable yield for their government securities, are still opposed to the introduction of European Government Bonds. The best ratings (Triple AAA) by Standard & Poor’s for the six Euro countries Germany, Austria, the Netherlands, France, Luxembourg and Finland are also not set in stone, which could have a negative impact on the European Financial Stability Facility (EFSF). A possible downgrading of France would significantly reduce the value of the EFSF. This is added by the fact that the participation of private entities in the rescue package, also called leverage, remains behind expectations. Whilst the Commission, in contrast to Germany, is in favour of a quick implementation of the “Eurobonds”, it is in full agreement with Germany in respect of tightening budgetary supervision and coordinating economic policies within the Eurozone. This means nothing more than that highly indebted Euro countries such as Greece have to bow even more to the German austerity dictate, which after all reduces these countries’ prospects for growth even further. A vicious circle! According to the Commission, intervening into the tax sovereignty of the Member States of the Eurozone, will also be possible in future.
The Commission sees 3 possible variants for “Eurobonds”
In its Green Paper, the Commission proposes three Eurobond variants. The first variant suggests converting all current government bonds of the 17 Euro countries issued on a national basis into a genuine common Eurobond with joint and several guarantees. However, this option requires changing the EU Treaties, which is generally known to be a very slow process. The risk of free-riders, attracted by low interest rates, continuing to take on debt, would also be very high.
The second variant is similar to the model developed by the Think Tank Bruegel concerning “Blue Bonds” and “Red Bonds”. It suggests introducing “Eurobonds” (Blue Bonds) up to an overall debt of the states amounting to 60 % of the BIP, which would probably be awarded top grades by the markets. Repaying debt above the 60 % mark, a Member State would have to be satisfied with “Red Bonds”, whose yield is far more unfavourable. Although this variant is less ambitious, it significantly reduces the risk of free-riders.
Last but not least the third variant: “Eurobonds” only partially substitute Government Bonds and there is no joint and several guarantee. This variant would also not require Treaties to be changed. It is possible to participate in the public consultation as a consequence of the Green Papers until 8 January 2012.
Links:
Green Paper der Commission (currently in English only)
Red and Blue Bonds Modell by Bruegel
The Commission sees 3 possible variants for “Eurobonds”
In its Green Paper, the Commission proposes three Eurobond variants. The first variant suggests converting all current government bonds of the 17 Euro countries issued on a national basis into a genuine common Eurobond with joint and several guarantees. However, this option requires changing the EU Treaties, which is generally known to be a very slow process. The risk of free-riders, attracted by low interest rates, continuing to take on debt, would also be very high.
The second variant is similar to the model developed by the Think Tank Bruegel concerning “Blue Bonds” and “Red Bonds”. It suggests introducing “Eurobonds” (Blue Bonds) up to an overall debt of the states amounting to 60 % of the BIP, which would probably be awarded top grades by the markets. Repaying debt above the 60 % mark, a Member State would have to be satisfied with “Red Bonds”, whose yield is far more unfavourable. Although this variant is less ambitious, it significantly reduces the risk of free-riders.
Last but not least the third variant: “Eurobonds” only partially substitute Government Bonds and there is no joint and several guarantee. This variant would also not require Treaties to be changed. It is possible to participate in the public consultation as a consequence of the Green Papers until 8 January 2012.
Links:
Green Paper der Commission (currently in English only)
Red and Blue Bonds Modell by Bruegel