Jean-Claude Juncker and Giulio Tremonti have broken the wall of silence on Eurobonds and are right to recommend the transfer of a major share of national debt to the Europen Union. As Yanis Varoufakis already has made plain, whether this is 40 per cent or 60 per cent as we have recommended for such a ‘tranche transfer’ in our own Modest Proposal is a secondary issue. But their recommendation that the transfer should be to a European Debt Agency whose bonds would be mutually guaranteed by member states is a primary error, for several reasons.
- Buying up national debt is only a reactive rather than structural solution.
- It is costly and also doesn’t work.
- It only temporarily reduces spreads on the most exposed member states’ bonds, as has been seen since May.
- A European Debt Agency resonates of Schuld as both debt and guilt rather than Credo as credit and belief when electorates need convincing that governments can govern rather than bond markets rule.
- A new institution would not have the credibility of the European Investment Bank.
- There is no need for a ‘mutual guarantee’ of the transferred debt by member states.
- Angela Merkel and much of German public and political oinion is opposed.
Yet, in a key sense, Angela Merkel is right. Neither German nor other taxayers should have to buy out the bonds of other countries. There is no reason for such a ‘buy out’ nor for a mutual guarantee. For if the tranche transfer of a share of national debt were to the ECB rather than a new debt agency this of would of itself cut the interest rates on the transferred debt. The member states should service the transferred share but would be doing so at much lower interest rates. This also would lower spreads on the share of their debt that remained as national bonds.
Yet this needs learning up from the success of the New Deal which encouraged Harry Truman to approve the Marshall Aid programme from which Germany herself was a key beneficiary.
1. US Treasury bonds are not guaranteed by Calfornia or Delaware. Nor did Roosevelt ask for this in expanding them to finance the New Deal. Nor seek to buy out their State debt.
2. The European Central Bank not only should hold the debt transferred to it in Eurobonds but go for net issues by them just as Roosevelt sanctioned net issues of US Treasuries.
3. These would attract funds from the central banks of surplus economies and their sovereign wealth funds which have made plain that they want a more plural global reserve curency system.
4. The inflow of funds to Eurobonds could finance the European Economic Recovery Programme to which EU governments have been committed since 2008 but which is being ravaged by the current response to the national debt crisis.
Yet it Angela Merkel can grasp that this ‘twin strategy’ of a tranche transfer and net bonds issues by the ECB in that it would not mean German taxpayers needing to underwrite Eurobonds, she could help Europe by-pass the proposed dead-end debt agency proposal.
This would transform the Eurozone from weakness into strength. Governments would gain credibility for a proactive response to the crisis, rather than only offering guilt and attrition as a response to unelected rating agencies and bond markets.