There are many common misconceptions on Eurobonds out there. I was going to compile a list, but the German economic newspaper Handelsblatt did me the favor of having them all in one article – however not identified as such.
Misconception 1: Nothing new about Eurobonds
Handelsblatt quotes Hans-Werner Sinn, a German economist, in saying: „If the European Financial Stability Facility (EFSF) would buy Greek bonds, that would equal Eurobonds“. Well, that is of course not correct, because the Greek bonds would yield higher interest than the Eurobonds would. And there is one mayor other difference, at least to the Red/Blue Bond proposal for Eurobonds: It doesn’t allow for the default of a country.
Misconception 2: Eurobonds introduce common liability without common financial policy
That is also not true for the Red/Blue Bond proposal. The common liability is only given for the part of the bonds that are almost certainly going to be repaid. Economically, the common liability will exist to a much lower extend as it does now. Now Germany has little choice but to bail Greece and other, because it a country default will endanger Germany’s own banking system. With the Red/Blue Bond proposal a country’s default will have little impact on the banking systems as banks are not allowed to have Red Bond exposure.
Misconception 3: Eurobonds create intransparency
Critics claim that Markets will not have the lever anymore to distinguish between the countries according to their financial prudence. The opposite is true. This misconception is in a way based on misconception 2. If there is a common liability the argument goes, than we have the same market prices. That is of course only correct for Blue bonds. Red Bonds will be much more sensitive to a country’s financial behavior as the current normal bonds. It will be such a good measure of financial prudence that each country should be forced to issue some Red Bonds even if the Blue Bonds are not yet fully at 60% GDP.
Misconception 4: Eurobonds weaken other bonds
That argument is actually a bit weird: It claims that because Blue Bonds are saver, Red Bonds will be less so. And Red Bonds will be more likely to suffer a hair cut than Blue Bonds. Therefore investors will be weary to invest in Red Bonds. Well, that is not a misconception – it’s the very point of the Blue/Red Bonds plan. Because investors are reluctant to invest in Red Bonds, countries will be reluctant to raise debt above 60% of the GDP.
Misconception 5: Eurobonds deter the effort to save
The argument goes: Why should someone save if borrowing is so easy? This is misconception 2 in disguise again. In the Red/Blue Bonds approach borrowing will only be easy until 60% of GDP. Thereafter it’s going to be tougher than it is currently. So the market pressure to save will increase rather than decrease.
Misconception 6: Eurobonds will let the Eurozone explode
The argument goes: With the Eurobonds the national (read Greek) parliaments will only discuss what Europe might approve as a measure and act as a fully sovereign state anymore. If things go from bad to worse, Greek politicians will blame Europe and Germany. Again, the opposite is true. This is a real threat in the current system with the EFSF granting credit in return to austerity measures. Eurobonds will not be attached with politicial measures, but with the Red Bonds having the easy default built-in, Greek politicians will face the consequences of their own decisions. The Greek democracy keeps it’s full sovereignty.
Misconception 7: No parliament can actually vote on this
Maybe, but if so this is certainly also true for the EFSFs and ESMs out there. Again, the Red/Blue Bonds approach is from my point of view much easier to comprehend for member of a parliament than the „Stability Fonds“. Even more important, with the Eurobonds parliaments keep their national budget responsibility, while with EFSE/ESM the spending is directed by the national governments and thus the executive force rather than the legislative.
There might be some drawbacks of the Eurobonds, but Handelsblatt failed to come up with any.
- How to make Eurobonds work (verlorenegeneration.de)