Back on the agenda: eurobonds
Q What are eurobonds?
A It depends on whom you ask. At their most basic level, “euro bonds” are a way of using Germany’s fiscal credibility to underwrite the huge debt piles of more profligate countries. In other words, they are effectively a way of transferring German wealth to other countries.
Q How do they work?
A It’s not yet clear. Broadly, there are two kinds of proposals for eurobonds, and they are radically different from one another. One focuses on building the Eurozone’s “firewall” and would effectively mean fiscal union, whereby the region’s bailout fund or a southern European country could issue debt guaranteed by all euro countries without seeking permission. That would basically mean that Germany would agree to underwrite the whole euro project to the tune of trillions. The other proposal has been dubbed “baby eurobonds” by Berenberg Bank’s Holger Schmeiding. Its aim is to fund the EU’s growth plan, whatever it turns out to be. It would involve institutions like the European Investment Bank or European Commission issuing bonds underwritten by all euro or EU countries and using the proceeds to fund initiatives to stimulate to growth, like infrastructure projects.
Q Are either of these going to happen?
A The growth-focused eurobonds are more likely than the firewall bonds, mainly because Germany will not agree to simply underwrite other countries with trillions in guarantees. French president François Hollande has caused a stir by attaching his name to a grand plan for eurobonds, but his proposal is actually for “baby eurobonds” issued by the EIB rather than for a massive beefing up of the Eurozone’s firewall. In other words, it is a way of getting Germany to fund a Keynesian stimulus, probably to the tune of €10-20bn. Whether it will work is unclear.