Johan Van Overtveldt–The Eurobond Challenge

Twice weekly through the month of November–though with a short break for the recent Thanksgiving holiday–Johan Van Overtveldt, author of The End of the Euro, will be blogging here about the euro crisis.

The European Commission is proposing to introduce eurobonds to help end the ongoing Eurozone crisis. These eurobonds would be backed by all the member countries of the Eurozone, even if the bonds are issued to cover the deficits of, say, Greece or Italy. Many leading European politicians and economists have already come out in favor of eurobonds. Regardless, they’re a bad idea.

Introducing eurobonds at this point in time would effectively repeat the single biggest mistake made when the monetary union and the euro were launched in their present form back in 1999. A monetary union without a fully empowered political union among its member countries will always be subject to severe strains and frequent periods of instability. Recent history provides us with abundant proof of this. Similar problems would occur if eurobonds were introduced before real political union exists among the Eurozone nations.

For those countries with weak to nonexistent reputations in the international financial markets, eurobonds would not only regain them access to those markets, but would also result in substantial interest rate decreases. Both history and political logic indicate that the governments of these countries would almost certainly then ease off on their efforts to bring their budget deficits under control and restructure their economies. Without real political union, the other countries would have no real power to oblige these economically weaker countries to make the hard choices necessary to strengthen their economies. Hence the very outspoken opposition to eurobonds coming from Germany, the Netherlands, and Finland.

In the case of Germany, this opposition to eurobonds is further backed up by a very explicit decision of the German Constitutional Court a few months ago, which stated that eurobonds without the existence of a real European political union would violate Germany’s constitution.

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