Peter Bofinger’s Euro-bundles are a Step Backwards – to the EFSF’s toxic bonds. But they do point to a real solution

by James Galbraith, Stuart Holland and Yanis Varoufakis (*)

Peter Bofinger’s proposal for Euro-bundles (see here for an introduction) serves the noble purpose of rekindling the debate on the Eurozone’s fiscal and monetary incoherence. The idea behind Euro-bundles is to issue a common bond without joint liability that the ECB can then purchase in the context of a monetary policy that uses quantitative easing to fend off deflation, with the welcome side effect of lessening the Eurozone’s borrowing costs. While we shall be arguing that Professor Bofinger’s Euro-bundles are ill- conceived, we applaud his idea of a common bond involving, in some capacity, the ECB.  This idea points in the direction of a genuine solution to the Eurozone’s fiscal and monetary fragility.The problem with Professor Bofinger’s Euro-bundles

Euro-bundles are not new. Indeed, they are virtually indistinguishable FROM the bonds issued by the EFSF (an SPV hastily conceived in May 2010 to raise the funds necessary for the Periphery’s ‘bailouts’) and by its permanent successor, the ESM. They are bundles of sliced up sovereign bonds, with each slice corresponding to one member-state debt (in proportion to their GDP), complete with separate interest rates and different default probabilities. In short, they are a CDO-like toxic debt instrument that contains (as we have explained here,  here and here long ago), the domino dynamic; which led to the sequential bankruptcy of several Eurozone member-states after the creation of these EFSF-bonds.

In short, Europe has produced such Euro-bundles before, with dire consequences. So, what is new in Professor Bofinger’s proposal? The novelty is that the ESM (or a new Special Purpose Vehicle, an EFSF Mk2) would be issuing a lot more of these bonds on behalf of member-states on the understanding that the ECB will be purchasing them through quantitative easing (i.e. of its monetary policy) aimed at combating deflation. This seems both unlikely and unwise to us on two counts: First, the ECB could buy, if it decides to adopt quantitative easing, existing sovereign bonds from each member-state in proportion to their GDP. No need for Euro-bundles here. Second, Professor Bofinger’s argument that Euro-bundles will help ease the Periphery’s borrowing costs, as well as slow down the flight from Peripheral to Core bonds (in a time of crisis), seems weak for the following reasons.

The weakness of Euro-bundles is revealed when we examine how the financial sector will respond to their creation. For if Euro-bundles were to be sold on to private investors, what would stop financial engineers in Goldman Sachs and its competitors from constructing derivatives that effectively ‘unbundle’ the Euro-bundles, selling those new derivatives to investors, with different risk preferences and speculative ambitions? Capital could then flee the Periphery’s debt in favour of bunds and other core bonds just as easily as if no bundle had been issued. For as long as the Euro-bundles, like the EFSF-ESM bonds, are CDO-like in construction, their inner fragmentation can allow markets to unbundle them at the drop of a hat. This is, indeed, what we observed over that past few years with EFSF-bonds, at least until the ECB stepped in with the game-changing announcement of OMT; i.e. with the threat of massive debt monetisation.

Salvaging Professor Bofinger’s underlying idea: The case for ECB-bonds

Professor Bofinger proposed Euro-bundles to solve two problems afflicting the Eurozone: First, to create a common Eurozone debt instrument that the ECB could purchase as part of quantitative easing, the purpose of which is to stave deflation off once interest rates have reached their zero lower bound. Secony, to find a roundabout way to ease the Periphery’s borrowing costs without, however, having Germany or the Netherlands guarantee the bonds (or part of the bonds) of Greece, Portugal or Spain.

We fully support the notion of a new, Eurozone-wide debt instrument that is not jointly guaranteed by member-states (i.e. with no joint liability) but which helps consolidate both fiscal and monetary policy within the common currency area, with the ECB playing a major role in its creation and management. But, if the ECB is to play a major role (as it ought to), why confine this role to that of the new bond’s (quasi-guaranteed) buyer? Why create a new SPV to (or have the EFSF) issue Euro-bundles to be purchased by the ECB, or have the ESM do something similar, when the ECB could itself be the issuer of a solid, homogenous ECB-bond that would be immediately marketed to the  joy of investors everywhere?

This has long been a central policy recommendation of our Modest Proposal for Resolving the Euro Crisis: ECB-bonds! (See Policy 2: An ECB-mediated Limited Debt Conversion Program.) Our recommendation is that the proceeds from ECB-bonds would be used to service, not to buy, Eurozone member- states’ debt up to a ceiling, the Maastricht ceiling of Debt to GDP, which is fixed at 60%. Obviously, the servicing stops when each ECB-bond matures and is redeemed by the member-state debited with its servicing, not the ECB. During the ECB servicing period the member-state pays the ECB its own servicing cost plus a small fee, so the ECB does not monetise any country’s debt; nor is there German liability for the ECB-bonds issued on behalf of Greece or Portugal.

The merit of our ECB-bonds proposal is that it kills three birds with one stone:

(A) The BONDS bring into being a solid, homogeneous common Eurozone bond (unlike the current EFSF-ESM CDO-like bonds or Professor Bofinger’s Euro- bundles) that will attract idle savings from far and wide.
(B) They offer the ECB a way out of its monetary policy paralysis (as the ECB will be able buy back its own ECB-bonds from private sector banks; thus effecting quantitative easing)
(C) They offer the prospect of co-financing a European Investment Bank-led Recovery program, as per our Policy 3 recommendation in the Modest Proposal.


Professor Bofinger has correctly identified a dangerous GAP in the Eurozone.  A GAP that requires that a new Eurozone-wide debt instrument BE created in order to allow the ECB to carry out its monetary duties, and TO escape its current paralysis in the face of powerful deflationary forces. His proposal for Euro-bundles, however, represents a step back to the EFSF- ESM toxic bonds.

However, the idea of a new debt instrument, in whose creation the ECB must play a central role, is spot on. The optimal debt instrument for these purposes must be solid and homogenous and must not require joint liability of core and peripheral member-states. The  solution is the issue of ECB- bonds, as part of a Limited Debt Conversion Program that we outlined in the Modest Proposal.

(*) We owe a debt to George Krimpas for having spotted the gist of our argument even before we did, and having provided even part of the wording above.

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    • Very nice article in the newspaper Handelsblatt by an infamous German Neonazi-Sympathiser Prof. Karl Albrecht Schachtschneider:

      ” Während der Euro-Krise erklärte Schachtschneider 2010 den Euro, gegen dessen Einführung er 1998 geklagt hatte, für „gescheitert“.[22]

      Anton Maegerle kritisiert im SPD-nahen Informationsportal Blick nach Rechts die Aktivitäten Schachtschneiders bei rechtspopulistischen und rechtsextremen Gruppen und Parteien. Er nannte unter anderen dessen Auftritte am 10. März 2009 bei einer Veranstaltung der Bürgerbewegung pro Köln, am 30. Januar 2009 bei einem Kongress der FPÖ, als Sachverständiger im Sächsischen Landtag auf Einladung der NPD, als Referent im Studienzentrum Weikersheim, bei einer Sommerakademie von Leserkreisen der Jungen Freiheit, bei einem vom Verein zur Förderung der psychologischen Menschenkenntnis ausgerichteten Kongress und Auftritte neben Rechtsextremisten bei diversen Burschenschaften sowie einen Artikel Schachtschneiders in der rechtsextremen Zeitschrift Die Aula 2006.[23] Maegerle schätzt Schachtschneider als „Grenzgänger zwischen Rechtspopulismus und Rechtsradikalismus“ ein.[24]”

    • In GErmany they call anything a Nazi that in other countries would be a conservative.

    • (@Aristoteles

      You forgot to mention that Schachtschneider was one of those people who filed the initial suit in the first place and that an op-ed article on this subject written by him can hardly be regarded as a product of sound journalism.)

      As much as I agree with Mr Varoufakis and appreciate the effort of Mr Bofinger to find a solution to the crisis outside the neoliberal austerity line, I fear that the latest ruling of Germany’s constitutional court is another fine example of why any attempt to circumvent german legal objections to any such proposals is doomed to fail. And that is not due to any iron-clad constitutional laws preventing the government from changing course. The whole legal argument is just another smoke-screen and I imagine that the constitutional court judges were well aware of that, which is why they passed the final decision on to the european court of justice.
      Even if Ms. Merkel and her fellow austeritarians would somehow magically come to their senses and agree to a reasonable alternative in principle, it would not be the law preventing them from acting on such hypothetical insight. The last two coalitions led by Merkel hold the record of passing laws that had to be revised or abandoned because the court ruled that hey were unconstitutional. Obviously, adherence to the constitutional rights of her subjects has never been a priority to the Chancellor. What really concerns her and her ruling parties is the fear of being chased out of office with pitchforks by a raging mob of their own voters.

      People seem to get the impression that the German Constitutional Court is in the business of ruling on things like that on its own accord. In fact, like any other court of law it needs a real person or group of persons to officially complain about something in order to start working and pass judgement on wether or not the constitution is being violated by current laws passed by the legislation. And like any other court of law it has some leeway in deciding about the validity of said person’s claim. Unfortunately in the case of Mr Schachtschneider and his like-minded fellow suitors, it accepted the complaint.

      One has to mention though, that Schachtschneider and his buddies are not only sympathizers of right-wing nationalist radicals and extremists and honoured speakers at their gatherings, as well as guest authors in their various publications (which, for non german-readers, is the tenor of that quote from the german wikipedia-entry).
      Along with many like-minded economic experts – some of whom are also members of some of our fellow forum poster’s favourite anti-euro party AfD and even of the former coalition member FDP – they are also frequent and passionate narrators of the german middle-classes’ favourite scary tale: the imminent doomsday of hyper-inflation caused by excessive ‘money-printing’ of the central bank.

      This worst nightmare of twice post-war Germany was the german government’s alleged argument for demanding from the other founding members, of the ECU – particularly France – that the ECB be modeled after the german Bundesbank, which at the time was run by die-hard monetarists, that its function be restricted to managing price stability and that it be banned from any other macro-economic interventions.

      The majority of non-german economists who have a voice in the matter seem to agree more or less that the OMT was a necessary, if perhaps insufficient step by the ECB in order to save the eurozone from collapsing.
      But parts of the german expert community refuse to acknowledge that little detail in their endless urge to depict themselves as the last defenders of reason against the roaring masses of inflationist insanity raging against our borders.
      They can also rely on parts of the elites to aid in their holy crusade, because the plutocrats are becoming increasingly annoyed by the fact that their wealth won’t multiply itself as fast and effortless as it used to anymore within a global climate of low interest rates, credit crunches and declining investments.

      Apparently, many members of the influential german middle- and upper middle-class, who constitute the majority of citizens who still bother to vote, are suffering from some kind of bipolar disorder, being torn between their seemingly unconditional admiration for the seemingly Euro-friendly Chancellor and their rising need to distinguish themselves from the lowly peasants within and without the country, who they imagine to be grabbing at their hard earned savings via taxes and charges for social security, illegitimately imposed upon them by the government.
      It goes without saying that people from southern and south-eastern Europe are considered especially ruthless in their efforts to steal the german’s cars and houses from under their noses and that they are supported in their sinister endeavours by the socialists who have secretly taken over Brussels and Berlin.

      The worst among these percieved instruments of robbery, however, is the government’s rising debt-level, which they have been told will end up as an unbearable burden on their children. According to Schatchtschneider et. al., Inflation is just another means for insatiable Big Government to rid itself of those debts at the cost of the average citizens’ earnings, pensions, and life insurance policies and it doesn’t take much to imply that it will eventually lead us back to a post-war scenario where everyone has to carry their worthless money in a wheelbarrow in order to buy food at the local grocery store.

      Since the well deserved departure of Ms. Merkel’s former coalition partner FDP from the Bundestag and the government, talk about hyper-inflation has somewhat died down amongst german mainstream politicians. But it is actually still quite alive in the hearts and minds of the general public who have been experiencing at least stagnation if not decline of real wages over the last decade. Many people have been lead to believe by ‘experts’ like the infamous lawyer Schachtschneider, that their steady loss of purchasing power is a result of the dreaded ‘printing press’ running red-hot in the basement of the ECB’s tower of doom in Frankfurt.

      Consequently, the majority of german economic experts, politicians, influencial journalists and newspaper editors, who are also almost exclusively members of the above mentioned upper middle-class, is in complete denial over the possibility that the dichotomy between this perception of a rising inflation rate in Germany and the fact that the Eurozone is actually rather in danger of slipping into deflation, might be a result of the famous german policy of ‘wage restriction’ and other so called structural reforms now ‘recommended’ to the rest of Europe’s governments. And they completely fail or refuse to acknowledge the correlation between the rise in corporate profits and capital gains at the top of the food chain and the loss of real wages for the majority of the countries’ workforce.

      It seems only logical then, to also deny the notion that the design of the ECB itself as nothing else but a watchdog for overall price stability might have played an integral part in allowing the Eurozone countries’ competitveness to diverge as much as it did. Otherwise, the central bankers could have realized much earlier that Germany was undermining the agreed upon inflation rate internally, while others went too far above it, instead of just looking at the average rate and finding nothing wrong with it.

      Circular logic now dictates that, since the ECBs principal design was flawless, it cannot have failed to do its job prior to the crisis and therefore must not be allowed to do so in the future by changing its modus operandi.

      Which leads me – again – to the conclusion that the german elites and their pet government are driven by a viciuos circle of their own self fulfilling prophecies and that no proposal, however smart and reasonable it may seem from outside this infinite loop, will keep that monster from trying to feed itself on its own flesh until it has completely devoured itself.

    • @Hubert Marcks:

      Leider vertreten Sie eine “Außenseitermeinung” in Good Old Germany.

      Der “Durchschnittsdeutsche” gibt sich stattdessen unsinnigen Theorien, Vorurteilen und Hetztiraden hin.

      Aber was solls Mutti Merkel und der andere Moralapostel aus dem Osten werden es schon richten und den “Betrüger-Griechen” zeigen was protestantische Ethik bedeutet 🙂

      Der Kapitalismus ist ja bekanntlich die Weiterentwicklung der protestantischen Ethik.

    • @Aristoteles

      Da haben Sie leider ziemlich recht. Dieser missionarische Hang zur calvinistischen Selbstkasteiung wäre eigentlich auch ein paar Bandwurmsätze wert 🙂

  • Sounds like a “moderate proposal” to me. I’m not sure how much it would really be appreciated by the markets and help e.g. Italy and Greece by effectively enforcing the same interest for their bonds as for those of e.g. Germany and Austria.

    I guess it would make sense from a macro EU perspective if the loss due to the “one size fits all” interest rate for e.g. Germany is smaller than the gain for e.g. Greece.

    Is there a way to reasonably accurately calculate that in advance?

  • Dear Yanis, Can you please comment about the TPP+TTIP ‘conspiracy’ being organized by the Obama Administration with the collaboration of the UE –which is not informing the EU countries of its participation? I am enclosing a commentary from Ragging Bull-shit for reference. (The Excellentia 2000 Foundation in Spain)

  • The Germans will never accept it so why do you keep insisting on this?
    Isn’t it time to start telling the people of Europe the reality rather than telling them that there will be a common bond?

    The reality is that the common currency failed as it resulted in 30% unemployment in the
    most inefficient countries and 5% in the most efficient ones. The failure is not in the resulting gap, but in the
    fact that the ones with 5% unemployment could care less about the ones facing 30%. In fact they could care less if illegal immigrants piled up in the inefficient countries as long as they were not interrupting life in the efficient countries.

    It is simple numbers and simple emotions and there are not enough enlightened Europeans to change any of that.
    Politicians like Tsipras in Greece are trying to fight Germany to promote a more common fate in Europe, but Germany
    as a nation and as the financial backbone of Europe simply says NO. What does it take for someone to understand that
    NO is NO and it is not IF BUT WHEN or YES.

    Why lie to the people in Greece if you know that NO is NO? Why not be open and honest?

    The biggest farce in Greece right now is the corrupt parties that are still in government and the left-wing Syriza party positioning themselves for electing the European parliamentarians with the 250K a year salaries. All are pushing for the Euro oblivious to the 30% unemployed and the deeply depressed economy.

    Greeks are being asked to pay real estate taxes on non income producing properties, based on pre-crisis property values, taxes that are not even deductible from income. Renovation expenses are not even deductible from income. Income is taxed from the first euro. There is a massive tax invasion on the middle class aside from the austerity measures.

    • I never told anyone that a common bond is coming. My task is to deny the powers-that-be the right to claim that TINA (there is no alternative).

    • The problem is that it is not Europeans as a whole that get to decide.
      It is only Germans that decide so TINA it is. Germany dictates everything,
      the ECB is just a puppet of Germany, their role was, is and will be purely
      decorative when you have gaps in unemployment of 25% between member
      countries. They could care less really, I am sure their salaries are tax free anyway.

      Trichet was one of the most incompetent ECB presidents, keeping
      the euro at 1.40 and rates high, accelerating depression in the southern countries.
      The extreme opposite of Bernanke that got unemployment from 9-10% to 6.5% in no time.

    • “I am sure their salaries are tax free anyway.”

      Exactly, this is how the huge transfers to EU are paid…

  • I found this link on nakedcapitalism blog:
    “…I believe that it has to do with the fact that the entire Greek state apparatus is being dismantled, in order for Greece to be turned into a controlled periphery of Europe, where foreigners — whether they are EU bureaucrats, politicians, or investors — will be able to come in and take over full control of the state, which will have in the meantime ceased functioning as an independent, sovereign entity. This should not come as a surprise, when considering that towards the end of 2013, German magazine Der Spiegel referred to Greece as a cross between “Afghanistan and Pakistan,” that it is a failed state. This term was not used by accident. “Failed state” is a term that is used in diplomatic circles to refer to countries that are incapable of governing themselves, and which as a result require international control, oversight, or intervention. I believe that the groundwork is being laid systematically to “justify” the characterization of Greece as a failed state, or as German Chancellor described Greece back in September, as a “dependency” located in Europe’s periphery. All of this is meant to justify the claim that the Greek State is no more…”

  • Genius Bofinger presents the Euro bundles as a tool to save the Euro. As described above this does not work. To put in 2 sentences: (1) The Euro bundles lower borrowing costs for all EURO countries. (2) The natural interest spread will remain

    What is the result? (1) A Transfer of private wealth (savers) to the government. and (2) higher borrowing cost for the PIFGIBS. tahn for the (past & future DM block).

    –> This will not help to save the Euro Zone, unless in order to save the Euro capital controls are introduced and free movement of goods is limited.

    Any “tool” with Joint liability will not fly due to German legal restrictions. So why spend all the energy to solve a Problem that without the Euro would not exist?

    • “Any “tool” with Joint liability will not fly due to German legal restrictions. So why spend all the energy to solve a Problem that without the Euro would not exist?”

      One could ask a similar question the opposite way.Why try to solve a problem within the euro restrictions (Maastricht Treaty etc) that without these restrictions would not exist?
      And on top of it all, these restrictions are the exception to the rule.

    • Then you would need to exclude Germany and maybe others from the currency union. The German constitution clearly says that Germany can only be part of a stable currency zone. Weak currency Regimes like Italy, France and the rest had are not allowed.

    • Correction: It is not written in the constitution. It is was a ruling of the constitutional court.

    • I’m sorry but you are moving the goal posts here.Your problem is the very existance of the euro while you pretend that it’s the problems it has caused.
      For the problems it has caused are a direct result of the fact that unlike every other normaly functioning common currency area (which is mostly equal to single countries) there is no single entity with the ability to aleviate internal imbalances or all sorts of economic shocks through discretionary spending (and Germany DID do that when it violated the Maastricht Treaty, and thank God it did, it was good for you in Germany) and with a central bank to act as a lender of last resort.

      The Euro doesn’t have that.But you suggest that, was it to have that, Germany should stay out due to a Constitutional Court Ruling.You think if Germany stayed out it wouldn’t have created the same mechanics that define a normally functioning currency area?It did BEFORE the Euro,what makes you think it will not after it ?
      You don’t make sense at all.

    • And by the way,
      if I’m not mistaken, the Constitutional Court uses European treaties as the basis of its claims.While the treaties are precisely what defined the flawed structure of this currency.
      Courts only try to make sure that rules are not violated.
      They’re usually not there to judge whether a parcitular rule is idiotic or not.

    • Of course I want to remove the root cause of the problems. Fixing all knids of issues but no the root cause makes no sense!

      What you propose is a tranfer union. In order to get that you would either Need to break Germany law/rulings, have a referendum in Germany or do it without Germany.

      Why can´t you accept the will/öaws/culture of other sovereign nation states? Most likely you also think the Swiss are bad because they let their people vote!

    • @Soundmoney:

      I promise you one thing idolater, when the Eurozone breaks up and the EU goes up in flames as a consequence of the EZ break up it will be Germany which will take the blame for that and not any other single country. Your politicians are playing with the fire.

    • I’m not proposing a transfer union because a transfer union is NOT necessary in a fiat currency system.Just because the euro was created like a gold standard doesn’t mean it cannot be a real fiat currency.

      I didn’t hear YOU say that Merkel and Scheuble are bad for not letting the Greek people vote on the referrendum Papandreou proposed.
      Are double standards a German hobby ?

    • Crossover since you think EU rules should be above nation state constitutions read this one: Article 125 of the Lisbon Treaty:

      1. The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.

    • I’m not reading anything SoundMoney.
      Your assumption that I somehow want EU rules to be above national constitutions is as idiotic as the assumption that we have socialism in Europe.
      How are we going to have a productive argument if you don’t even understand my position?
      Every comment you keep saying the same: blah blah blah Socialism,blah blah blah dictatorship,blah blah blah we work for the PIGS.

    • Crossover, I am in favor of direct democracy. It was a scandal that the referendum in Greece was killed. Merkel and Schäuble are Euro-Nazis or EU-Nazis take your pick. They do not care about “their” citicens and they do not care about citizens of other countries.

    • I never said I work for PIGS. I stopped working a lot. I just work as much as I need to cover our expenses. I do not increase our wealth anymore. It would only result into a lot of taxes and little time for my kids.

      So no socialism? What do you call socializing the debt? Socializing the risk of banks, etc? A key feature of capitalism is that risk/reward/decision is with one and the same stakeholder.

      We can also call it corporatism, if you like.

  • This is the official press release by German Constitution Court .
    At first glance it is an indication that ECB Outright Monetary Transaction (O.M.T) program is illegal and it assigns European Court to decide for the final outcome.
    The outcome is obvious that it will be against German Constitution Court first decision for illegally transactions.
    To everyone its easy to figure out that ECB is under “artillery fire” from other members and their request to offer their securities at financial institutions for cash.
    In one hand German play the role of bad partner with their objections to Outright Monetary Transaction but in other hand lets assume and focus our conservative estimate to their argument about of the restricted interpretership of ECB deed of partnership.
    Press release : “it exceeds the European Central Bank’s monetary policy mandate and thus infringes the powers of the Member States, and that it violates the prohibition of monetary financing of the budget”.
    To almost everyone its easier to blame German for dogmatic stance furthermore they may steal views from eurosceptics but they are not wrong.

  • Germany is enjoying too much benefit from arbitrage or Eurozone risk to do anything to end it.

    – There’s capital flight into Germany due to risk fundamentals, which are shaped by policy that Germany controls.
    – There’s currency arbitrage: €1 in a German bank is worth more than €1 in a Greek bank (until TARGET2 blows up).
    – The Euro is devalued by the continued misery of the south, favouring German exports.
    – The Troika acts as both creditor and receiver (resolution operator) of the south.

    It’s generous to treat German leadership as economically naive, perhaps believing romantic notions of gold and sound money from the 70s or even the 30s. But at some point we have to interpret their behaviour as not-enlightened self interest.

  • Just a pedantic point: the expression is “could NOT (or couldn’t) care less”. Germany cares so little that it could not possibly care less than it currently does. Ergo, it does not care AT ALL. 🙂

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