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Why Eurobonds Are Pointless
The Euro area seems to have drifted into something of a fiscal backwater with the debate over Eurobonds. German Chancellor Merkel has rather melodramatically declared that Eurobonds will not be an option as long as she lives. As UBS' Paul Donovan notes, European politicians go back and forth over the merits, necessity, and preconditions for Eurobonds. He sees this as "a waste of time". Eurobonds are not a necessary condition for the survival of the Euro, even though (in our view) fiscal union in some form is a necessary condition. The Eurobond debate is diverting valuable political and economic resource into what is at best an irrelevance, and at worst may actually undermine the stability of the Euro area.
Paul Donovan, UBS: Why Eurobonds are pointless
What is a Eurobond?
There is no single accepted definition of what a Eurobond would represent, although there are some common concepts. A Eurobond would be a collective liability of the Euro area governments. A Eurobond would be used to raise money for Euro area governments at a “pooled” rate of interest. Around this common ground there are then debates about how such a bond could be used.
Should the bond apply to cover national government borrowings of up to 60% of GDP (the Maastricht criteria)? If so it raises some interesting questions about how GDP is calculated, given the frequency of revisions. Should the Eurobond apply to new national government borrowing that has first been sanctioned by the Euro area heads of government? Should the bond supply funds to the ESM which are then parcelled out to the member states in case of need – which was indeed the original concept of the Eurobond when proposed at the May 2010 summit to save the Euro?
Is a Eurobond necessary?
The short answer to this question is “no”. The long answer is “no, of course not, not like this”.
What the Euro area needs, to tackle its dysfunctional monetary union, is some kind of fiscal transfer union. A fiscal transfer union does not solve the dysfunction of the monetary union, but it blunts the damage occasioned by a common monetary policy. Where monetary policy is inappropriate, the automatic stabilisers of fiscal transfer can rein in the economic divergence of the components of the monetary union area. This is why every single functioning monetary union on the planet, for over two millennia, has had a transfer union of sorts alongside the common currency. A Eurobond is a very clumsy fiscal transfer union. Those economies that are more creditworthy are surrendering some of their credit status to lower the borrowing costs of those economies that are less creditworthy. It seems reasonable to assume that the common Eurobond will have an interest rate that is higher than that of the best credits in the monetary union and lower than the interest rate levied on the worst credits of the monetary union.
This is all very well, but it is hardly precise. A strong credit may not be a cyclically strong economy, for instance. Transferring benefit from Germany (a very weak economy for much of the last fifteen years) to Ireland (a relatively strong economy for much of the last fifteen years) would have exacerbated the dysfunction of the monetary union and the common monetary policy; it would certainly not have mitigated the ravages wrought by a shared interest and exchange rate.
So what would happen without a Eurobond? A country in the Euro area could face mounting debt costs, and in the absence of a collective bond issue at a lower interest rate could be forced into default. So what? As California has so admirably reminded us (with a third municipality filing for bankruptcy just last week), there is no necessity for a collection of subsidiary monetary union governments to have common issuance or common liability for individual state debts. The point is that when default or bankruptcy occurs, the damage from the local economic fallout is partly offset by the fiscal transfer mechanism, leaving the local government to stand or fall in fiscal terms on its own merits. Citizens of San Bernardino in California will have lower services (economic stimulus) from their local government now that it is bankrupt. The unemployed of San Bernardino will still receive their benefits, however. The economic impact of the government’s bankruptcy is thus mitigated.
The damage Eurobond discussions could do
The Eurobond threatens significant damage to the Euro area. The concept of the Eurobond as currently envisaged is easily characterised as “rich countries helping poor countries”. The very notion of the Eurobond at the moment rests on the idea of national sovereignty as a driving force for the Euro area. National governments receive collective assistance by relying on the positive credit attributes of other national governments. There is a potential sense of intergovernment obligation. This view of the Euro area is potentially quite poisonous to the health of the Euro as an entity.
For the Euro to succeed there must be some idea of community. It is not about rich countries helping poorer countries; it is about rich Euro area citizens helping poorer Euro area citizens, wherever each group may happen to live. Eurobonds frames the debate and indeed the solution in entirely nationalistic terms, which is simply counterproductive.
Fiscal unions that are created top down very often have central government guarantees or pooled issuance programs for the local governments. This is because the local governments’ existence is contingent on the will of the central government. Fiscal unions that are created by a pooling of sovereignty from the bottom up (like the Australian Commonwealth or the United States, or the Euro today) have a very different relationship between central and local government. There is generally no necessity to guarantee or assist the local governments with their finances, other than that the central government may through its own independent fiscal policy seek to offset any economic downturn.
The Euro area needs to move away from nationalism and towards integration. Although superficial about integration, the Eurobond debate seems to be taking the Euro in the wrong direction, and giving rise to a perception of nations giving aid to other nations. The Euro is a bottom-up construct. A more integrated Euro area federation can (probably must) take place without collective responsibility for national debts. What is needed is collective responsibility for some aspects of fiscal policy to offset the damage of collective monetary policy. That is a very different concept from the Eurobond.
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Pointless is right. Just another delay tactic to avoid cutting spending.
Just like in the USA.
My name is John McCain. I was one of the Keating Five and I support this message.
"The problem with Scotland, is that it is full of Scots !"
-- Edward I, A.D. 1308.
"The problem with Eurobonds, is that they are full of euros !"
-- Tyler Durden, A.D. 2012.
It is truly tremendously difficult if not completely impossible to even fathom just "what" a EuroBond might actually be in its true existential form.
Who might be the issuer, under what terms, what guarantors, what collateral, what covenants, under what jurisdiction would it be subject, where would it rank in seniority and to that in reference to what, again and those to whats not being considered even similar or dissimilar, but merely definitions to be determined before any cogent conversation can be undertaken.
Meaning, right at this very moment, there's not a fucking thing to talk about.
Other than retract to the credibility of the "issuer" to do something to get its fiscal house in order (defined as what I do not know for nobody has yet quantified anything closely related thereto to wit: austerity... does not mean a promise to cut budgets at some future date while continuing to spend money like drunken sailors) which only retreats to the side show of further summits and platitudinous horseshit.
No.
I don't think so.
Probably not yet ripe for a SkullFucking Party.
as a drunken sailer I take offense.
Bingo, they are trying to delay having to cut spending and it's not working. The time of having your cake and eating it too is finally coming to an end. You can't have a free lunch for long.
Cliff notes; When there are no underlying assets of enough real value to back the requested debt, you are fucking insolvent!!! Default already and clear the unproductive debt.
That's easier said than done, the creditors actually want their principle back, plus interest of course.
The point being that the majority of the debt is bogus. Taking on debt to print money is bogus, taking on debt to pay debt is bogus, etc.
I'm certain once you try to convert that bogus debt to cash, reality sets in, but for now, in peoples minds, its real money probably backed by contracts.
Article is just wrong pushing this mega-EU, claiming:
« ... The Euro area needs to move away from nationalism and towards integration ... »
No
We are past 'peak EU' ... it worked as a trade and customs-free zone
That is what it will be again
There will not be a United European Empire
"it is about rich Euro area citizens helping poorer Euro area citizens, wherever each group may happen to live. Eurobonds frames the debate and indeed the solution in entirely nationalistic terms, which is simply counterproductive."
Each Euro countries government/banksters are corrupt and will not cede any powers of significance to outside forces, even for bonds (free money). Its like a mafia giving up territory to a rival, not going to happen.
Ha ha ha ha ha ha ha
+1, though I think the level is quite right, for the moment
Ineresting how many non-EU newsies, commentators and bankers keep asking for more integration, eh?
"Merge or break! Or else!"
And the "europe's debt woes are braking the world's growth" meme is also peaking, IMO.
Wow, this is probably the smartest post about Europe if´ve red so far here on zerohedge.
Huh?
"The Eurobond debate is diverting valuable political and economic resource into what is at best an irrelevance, and at worst may actually undermine the stability of the Euro area."
Naw... the pols need all the diversions that they can dream up. The fake cat fight over Eurobonds is, in media equivalency, like the fake fight over raising the US debt ceiling...
Did anyone actually believe the US pols would not raise the debt ceiling? What would the results have been?
1) They would not have ever been reelected...even as dog catcher
2) They love to spend money so why would they not vote for more money to spend?
3) When the social spending stopped all hell would break loose... and, it's going to sooner or later when the can hits the wall.
add your own favorite reasons...
The idea that Europeans are going to pool any more of anything is amusing, good to see all that bailout loot the banks got is being put to such productive and insightful use like this report.
Quote time - Three great forces rule the world: stupidity, fear and greed. --Albert Einstein
I can't make out what the little cartoony says.
It says: "The name's Bond, Euro Bond."
I like my debt unsecured, not vaporized.
¡VIVA LA REVOLUCIÓN!
http://www.examiner.com/article/rnc-confirms-ron-paul-will-be-up-for-nomination?cid=db_articles
17 countries are forced to work together and against each other for survival. Nationalism is going to be the people's choice. When there is critical mass, even their parasitic governments will have to do what they're told.
Which countries have offered to give up their sovereignity?
Germany offered for everybody else to give up their sovereignty.
That count?
The only wars that were fought in Europe in the öast 50 years were in "countries" that has a currency union: The former USSR and Yugoslavia
The American 'transfer union' is incomplete though and has never been tested with default in modern times. Medicaid and unemployment benefits are, in part, state responsibilities. Let's say California goes bankrupt. How willing would Texas and Ohio be to pick up the social welfare costs of California especially where California benefits are higher than in the donor country?
Well, not exactly.
We'd probably have to offer up California's sovereignty to Europe to get their bailout.
And betcha a lot of Californians would think that a really great deal... especially if Mittens wins.
For the Euro to succeed there must be some idea of community. It is not about rich countries helping poorer countries; it is about rich Euro area citizens helping poorer Euro area citizens, wherever each group may happen to live. Eurobonds frames the debate and indeed the solution in entirely nationalistic terms, which is simply counterproductive.
Or, it's about hard-working Germans helping lazy Greeks. You can argue which meme is the true one, but it doesn't really matter. Lumping both the Greeks and Germans into the same set of handcuffs is going to cause trouble. Getting either to accept the other's point of view about the necessity of hard-work vs. the right to early retirement is not going to happen.
The Germans were dumb to be begin with when they used loans to the PIIGS to support their exports. But you are just going to make it worse if you don't allow them to stop making that mistake.
The idea that somehow there is going to be any agreement on any form of collective responsibility going forward, when the Greeks haven't accepted any responsibility at all for getting into their current situation is sheer insanity.
Exactly. The ClubMEd countries have the productivity of developing countries. The developing know where they are, but the ClubMEd wants to lead a lifestyle like the Swiss and they expect the North to pay for it.
Fiscal unions may be fine for fluctuations but what if the downturn in some nations is very much a long term phenomenon? Does anyone honestly believe that wokers of one nation will forever feed the workers of another nation? Or what if, say Germany, is constantly feeding some nation which is running into trouble? Can Germany forever be the lactating breast?
I agree.
I ought to know. I am, after all, the Tsar of pointlessness.
I have this nagging feeling that European leaders have come to one conclusion after all their summits: The ECB must print like a fucking maniac. They see how the UK and Japan and the U.S. keep the game going. Central Bank printing is the only remaining "solution" since China, Japan, and Zimbabwe have all reneged on their promises to bail out the Eurozone, and Germany won't pay.
For the ECB to engage in truly massive, longterm Quantitative Easing, two things must happen:
1) The Eurozone needs a plausibly "equitable" transfer mechanism to funnel fresh cash to the broke governments & banks. Some sort of bullshit guidelines that the EFSF or IMF or ESM or Charlie Sheen or whoever ends up in charge of distributing the boodle uses to determine who gets how many boatloads of Euros and when.
2) The Eurozone needs Eurobonds to fund the bullshit, to be purchased by the ECB with digital magic unicorn money. The Eurobonds will sit on the ECB's balance sheet for 1000 years or until an "exit strategy" is in place, whichever comes first. The interest they earn will be turned over to the designated transfer mechanism for distribution to the broke Eurozone governments & banks.
They're working on it! Stabeelitee is at hand!
Eurobonds.
Shit.
But I repeat myself...............
Yes, there are only two ways through this mess, one is to scrap the euro, while the other is to have eurobonds. There is really no third way. You can't have a common currency without also having common bonds, period. This has been the obvious problem with the eurozone from the begining. Eventually, there will be a common bond. That is the only strategy that really buys them more time, several years in fact.
The last thing europe needs is a 'United Federated Socialist Reserve [UFSR] - European Banking System [EBS]',... with a dual-mandate, implementing an 'Unemployment [the Greeks will gladly bend over for this ?] Stability Act [USA]' for the EuroZone.
Think about the acronyms... USSA/FRBS vis-a-vis UFSR/EBS? And now, think of the Horror!!!
Mission Accomplished?
And now their are three? Libor, Fed Funds, and Social Fund Rates,... fantastic!
Why are eurobonds even being discussed by anyone anymore?
I'll tell you why they're pointless, because we already had them for 10 years between 1998 and 2008 and they caused the crisis.
See for yourself here: http://www.voxeu.org/sites/default/files/image/FromMar2011/CorsettiFig2....
That period of yield convergence is exactly what a Eurobond gives you: one pegged rate for sovereign debt across Europe. The "credit Schengen" that this facilitates masks the reality of divergent economies, meaning that Greeks can borrow like Germans even though the Greek economy is nothing like the German economy at all. The longer rates remain converged, the greater the imbalances that build up meaning that the inevitable explosion of markets returning to reality becomes bigger over time. We had the return to reality in 2008 as Europe could no longer keep denying true economic status with its virtual Eurobonds. Yields rapidly diverged back to where they should be and the only real crisis is the rate of that return, not the fact that they are different in and of themselves. Had yields never falsely converged in the first place, the European crisis would not exist because pointless Ponzi lending/borrowing would not have occurred in the fringe.
Eurobonds are only seriously being proposed by morons who learned absolutely nothing over the past decade. If Germany caves in and Eurobonds are adopted then absolutely nothing will be solved unless all nations also agree to give up sovereignty to a single country called the "United States of Europe". This is what the Eurocrats in Brussels want, it's what the banks want and it's what the corporate robots want. It will be a cold day in hell before European people accept it meaning that the battle lines have been drawn in the same place they're always drawn in: regular people vs the powerful.
This isn't about solving anything, this is about buying time, that was my point. And what the banks, eurocrats and corporate types want, they always get. Since when have they listened to the will of the people?
"it is about rich Euro area citizens helping poorer Euro area citizens"
Very noble indeed. But this is what the rich part of Europe has been doing for decades. Billions were pumped into Spain, Greece, Ireland, Portugal, Poland and other eastern European countries. Much of that money ended in the pockets of corrupt and greedy politicians and 'business' people. The poor profited from the money coming from the North but the poorer countries overborrowed on all levels because people wanted it all (this, by the way, also happened in the North but the North has an economy to back it up). Money was cheap but borrowing money, costs money. Now the bill is send to the rich Europeans. So the rich Europeans can bailout the poor ones. But without conditions please so it will be business as usual. I guess it is ok to bail out the poorer countries but not without some rigorous reform in these countries: away with the corrupt oligarchy, burocracy, kleptocracy and too much government spending. Innovate and renovate these societies.
Or they need to send us their virgin daughters in exchange!