Are eurobonds a suitable support measure for financially weak countries in the eurozone?
Government spending financed by government bonds
To finance their state budgets countries routinely issue government bonds. In this way they raise liquidity for the long term and compensate the buyers of these bonds with a fixed rate of interest. Here, the rate of interest depends, in particular, on the creditworthiness of the respective country. Countries with high levels of government debt have to pay higher rates of interest than countries with lower levels of government debt. Countries with high levels of government debt as well as a high default risk face the challenge that they will only be able to raise new capital on the market by offering a high rate of interest. Subsequently, the high amount of interest payable constitutes an additional burden for the budget. While Germany is currently able to raise capital virtually interest-free, countries like Italy have to guarantee considerably higher interest rates.
The concept of eurobonds
Eurobonds are supposed to address this challenge and offset the existing imbalance among the different EU member states. Instead of a government bond being issued by each individual country, the EU would act jointly to issue a bond. The creditworthiness assessment would then cover the highly indebted countries as well as those less heavily indebted. This would translate into an average interest rate that would take some pressure off the highly indebted countries. The debt would thus be mutualised because the creditors would rely on the good creditworthiness of the less indebted countries.
Please note: The term Eurobond is also used for Euromarket bonds where a company offers its bonds to investors in several countries. This type of Eurobond will not be considered here.
The European Stability Mechanism as an alternative
The European Stability Mechanism (ESM), which was established to manage the euro debt crisis in 2008/2009, replaced the European Financial Stability Facility (EFSF). The ESM hands out loans or guarantees to ensure that overindebted eurozone countries are able to make payments. In each case, these measures are tied to conditions related to economic policy reforms in the beneficiary countries and these are then monitored by the ESM. The ESM has subscribed capital of more than € 700 bn of which around € 410 bn is still available following the support measures that have been provided for countries like Greece, Portugal and Ireland since the establishment of the ESM. Germany provides approximately 27% of the funding volume of the ESM.
Weighing up the advantages ...
One particular positive argument is that, due to the participation of financially strong member states, eurobonds could possibly provide debt financing at levels of interest that could feasibly be paid. Eurobonds could basically be a way to help provide those eurozone countries that have poor creditworthiness with liquidity that they are able to fund and, thus, prevent individual member states from going bankrupt. The effects of the state bankruptcy of a large European economy and the consequences for other member states are not foreseeable and should therefore be avoided. A eurobond issue volume of one trillion euros could provide a major contribution of supplementary finance to the partially depleted funding volume of the ESM.
... and the disadvantages of eurobonds
(1) While the ESM ties its support measures to conditions related to economic policy reforms, in the case of eurobonds, financially weak countries would be under no obligation to take steps to improve their budgetary situation.
(2) For this reason, financially strong countries – including, among others, Germany – also view eurobonds critically because the way they work is based on the good creditworthiness of these countries and, moreover, the creditors rely on this strength in the system of joint liability should one or more member states default.
(3) From a legal perspective, this view is contradicted, in particular, by the “no bailout” clause laid down in the Lisbon Treaty (Art. 125 TFEU). According to that, the liability of the EU for the commitments of individual member states is excluded.
Conclusion: In view of the fact that the legal and organisational design has not yet even been basically negotiated or drafted, it is probably unlikely that eurobonds will be issued in the short term. Adopting a resolution with respect to the issuance of eurobonds will ultimately be a political decision and will be heavily dependent on the levels of government debt of individual countries and the speed of economic rehabilitation.