AS TURMOIL in the European credit markets continues to weigh on the euro, some analysts are pressing for the European Central Bank (ECB) to engage in Swiss National Bank (SNB) like intervention. But even the most accommodative monetary policy in the world will not produce a long-term solution for Europe. If the euro is to survive as a common currency for the bloc, the Eurozone must move to a much more unified fiscal structure. Which is why today’s release of a study by the European Commission (EC) on the subject of Eurobonds is of such keen interest to the market.
The EC study offers three possible scenarios on how Europe could issue debt. The first and the most radical option is to replace all the national credit issuance by bonds backed by the whole EU. This course of action would create a huge capital market that could compete on equal terms with US Treasuries, but it would also mandate extensive changes in the EU treaty and would require Europeans to give up much of their national sovereignty.
A more moderate approach is for euro area countries to issue “stability bonds”, which would only be partially guaranteed and would be subject to caps on volume. Such a solution could provide some relief to beleaguered Club Med economies, but may not be enough to stabilise the markets.
A third way would allow EU countries to issue a limited amount of “blue bonds”, which would enjoy the collective backing of all the members, and thereafter to issue “red bonds” which would be backed solely by the issuing sovereign.
Although the Eurobond idea may not become reality – especially if Germany refuses to give it support – the unprecedented turmoil in European credit markets has clearly put the issue centre stage, as policymakers begin to realise that they may have no other choice.
Regardless of which path they follow, the EU authorities will have to accept much greater integration of their fiscal policies – pensions and taxes are two of the most important elements that will need to become uniform across the union. If the EU turns to the Eurobond concept, euro-dollar will quickly find support.