by Edward Harrison
Last week I mentioned Eurobonds, bonds issued at the supranational euro zone level, as a vehicle some are pushing as a longer-term solution to any liquidity problems in the periphery. The thinking is that a pan-euro zone debt instrument could be used as a release valve for liquidity issues, allowing the truly insolvent to restructure their state level debt if necessary, without creating contagion.
The problem with the Euro bond is that it introduces the possibility of free riding by ‘profligate’ governments who get cheap funding on the back of ‘prudent’ governments. Many German policy makers are not interested in the Euro bond for just this reason. There is great resistance to European federalism. Otmar Issing, former ECB chief economist explains to Bloomberg’s Mark Barton in the video below he believes fiscal prudence is the only answer.