Eurobonds or Political Union are Not the Solution

I agree with Daniel Gros that Eurobonds are not the solution to the current European crisis. I also do not understand the argument that economic and monetary integration in Europe is failing because of the lack of political integration.

The only possible argument in favor of the idea that Eurobonds (or more political integration) would have solved the current crisis is that Greece, Portugal, Ireland, Italy or Spain are all doing fine and their only problem is that they are being attacked by speculators in such a way that the (high) market interest rate makes them insolvent. By attaching a different label to the bonds of these countries, the speculators will not be able to attack them anymore. There will be no PIIGS bonds out there, only Euro bonds.

This is a possible story and if indeed speculation is the only source of all of Europe problems, this might work. There are, of course, other solutions to the problem: a guarantee by the German or French government or by the IMF or the EFSF or any other credible institution that the bonds will be repaid and the interest rates will adjust to a level that makes those governments insolvent — this is to some extent the solution being adopted.

The idea that having German tax payers being responsible for the debt that all Euro governments issue sounds not only politically unfeasible but also, from an economic point of view, it could have made matters worse instead of better. What is needed is a credible and transparent fiscal framework that ensures sustainability of public finances. Hiding the “country label” when issuing bonds or pooling all the risk together and making all taxpayers responsible for the misbehavior of any government does not seem to be setting the right type of incentives.

One could argue that the same argument applies to the Euro as a common currency that replaced the national currencies of countries with limited credibility. Does this mean that the creation of the Euro is also a bad idea? No. Sharing a currency is very different from sharing a label (and the risk) when issuing bonds. Sharing a currency does not imply sharing the risk of unexpected changes in income or the cost of the mistakes that national governments or central banks might do.

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About Antonio Fatás 136 Articles

Affiliation: INSEAD

Antonio Fatás is professor of Economics at INSEAD. He is a Research Fellow at the Centre for Economic and Policy Research in London and has worked as external consultant for international organizations such as the International Monetary Fund, the OECD and the World Bank.

He teaches the macroeconomics core course in the MBA program as well as different modules on the global macroeconomic environment in Executive Education. His research is focused on the study of business cycles, fiscal policy and the economics of European integration. His articles appear in academic journals such as the Quarterly Journal of Economics, Journal of Monetary Economics, Journal of Money, Credit and Banking, Journal of Public Economics, Journal of International Economics, Journal of Economic Growth, European Economic Review or Economic Policy.

Professor Fatás earned his M.A. and Ph.D. from Harvard University, and M.S. from Universidad de Valencia.


1 Comment on Eurobonds or Political Union are Not the Solution

  1. i-CALUMNY the PIIGS:

    i- (Illinois)
    CA (California)
    LU (Louisiana)
    M (Michigan)
    NY (New York)


    P (Portugal)
    I (Irland)
    I (Italy)
    G (Greece)
    S (Spain)

    All these over-indebted states are calumniated from the same bad banks that has been saved in 2008 from thees now over-indebted states!

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