Remember when Greece in crisis and about to default on its sovereign debt and everyone was talking about a ‘closer union’ that involved eurobonds and fiscal transfers? You saw headlines at the Financial Times like this: “Eurobonds and fiscal union are the only way out”. That was late 2011 – over 5 years ago. No one is talking about eurobonds now – and I’m going to tell you why that matters.
First, earlier today I spied a tweet about youth unemployment showing 46.5% in Greece versus 6.8% in Germany. That’s an astonishing differential in the same currency area. So I retweeted with that addition.
In what other developed economy currency area are the contrasts so stark? I can’t think of one. https://t.co/YcaKXAUA3T
— Edward Harrison (@edwardnh)
James Mackintosh noted in response though that those numbers – while indicative of a broader dichotomy were not entirely representative of the different employment situations. To get a like for like – since young people are just starting out and may be in training or school, you need to compare the percentage not employed, or in education or training aka the NEET.
@edwardnh Broad pattern true but careful with those figs tho – look at NEETs, unemployment numbers misleading.
— James Mackintosh (@jmackin2)
Fair enough. Of course my point still stands: the eurozone as an economic area already supported by a single currency and free labor mobility shows a massive disparity in economic outcomes between its constituent parts. The question is how to create convergence of those economic outcomes where the past few years has seen a tremendous amount of divergence.
That’s what got me to thinking about eurobonds. Eurobonds are one way of tying the fortunes of eurozone countries together by eliminating – or at least greatly reducing – default risk. The thinking is that if you have a common currency and free labour movement and you still don’t have economic convergence you need to go further in uniting Europe politically and economically.
The German reunification example is the gold standard here. Not only did you have monetary union, but you had – and still have – massive fiscal transfers and political union. The two Germanys are now one Germany, though convergence is still not complete. But for Germany, the debts are fully mutualised.
In the eurozone as a whole, no one is talking about eurobonds though. That’s because they won’t happen.
I wrote why back in 2012 in the New York Times. Here’s the key part:
If one reads statements by leading German policy makers closely, it is clear that the Germans are not opposed to euro bonds per se. Rather, as Joerg Asmussen, a German member of the European Central Bank’s board, puts it, Germany “will only consider jointly underwritten euro area bonds once the conditions are right, meaning closer economic integration and coordination across the euro zone, including on fiscal matters.” Asmussen’s predecessor Juergen Stark has made the same argument. Last summer he told the Frankfurter Allgemeine Zeitung that euro bonds “do the least to solve the structural budget problems that some member states in the euro zone have. Rather, they can lead to a liability or debt union that no one wants. Only when important steps toward political union are made can we have common bonds.”
What the Germans were saying then and still believe today is that you need to get people in Europe on the same page regarding the ‘right’ approach to fiscal policy and the ‘right’ way of thinking about structural reform before you can have debt mutualisation. The Germans are saying, “yes eurobonds are good, but only in the specific circumstances where politics and economic policies are aligned. We would consider eurobonds in that case. But only then.”
Now if you fast forward to today, 2017, no one is talking about eurobonds because the pre-conditions the Germans have put on debt mutualisation aren’t there.
In fact, Europe is moving in the opposite direction. The forces that want ‘less Europe’ are ascendant. And they have made it such that the EU, not just the eurozone, is fighting for its very existence.
When, then, do we get convergence, if the very policies that Germany wants the Greeks to undertake, for example, have created a massive divergence? When will the conditions be right for eurobonds? I don’t think they ever will be right.
My view: the ECB cannot continue buying sovereign bonds forever. At some point, their role is done. And we will not have met the German pre-conditions by that time. If Europe is to stabilize and converge economically, it will need some kind of debt mutualisation to get there then. And that means the Germans are going to have to drop pre-conditions and jump into common bonds anyway. Given the politics, I don’t see this happening. There will be no eurobonds. And so, eventually, crisis will return to Europe.