Post Format

Europe does not Need the Distraction of Eurobonds

A quick disagreement with Paul De Grauwe is once again needed.

He argues against exiting the euro (I share his views) but warns that something must be done otherwise the European architecture will crumble apart (I share his views).

The solution?

A fiscal union, in the long run (I agree, provided the long-run is really long and we keep our patience intact).

And in the short-run? How can we allievate the pain of the patient and maintain political momentum?

Through eurobonds and the pooling of public debts.

Wrong. On 3 counts.

1) Germany will NEVER accept eurobonds. For the next 50 years that is. It is an explicit transfer from them to the South. Does such a transfer exist in the USA? Yes it does, today, but after more than 200 years of living together. And it is still quite a hidden mechanism anyway, embedded in the way taxes are raised and redistributed through the federal Government.

Didn’ Germany accept such an explicit transfer only 20 years ago with German reunification? Yes it did. But that was a transfer from the West to their first-degree cousins, it came (almost) naturally. We Italians, we Greeks, are only fifth-degree cousins with the Germans. Indeed, Europe works the opposite of a family: generation after generation family descendants separate from each other further (brothers, cousins, second-degree cousins …); Europe the way we want it will make the children of the children of my children ultimately brothers. A wonderful idea. If we work properly and patiently at it, that is.

What is needed right now is an instrument that is acceptable by the Germans. Nothing less.

2) De Grauwe uses a cold instrument for his warm operation of solidarity. Finance. Debt managers. Seated in Brussels. That will not be perceived by the people of the South as immediate solidarity. It does not guarantee that the savings in interest expenditure will be used to relieve the pain. It might, just as well, be used to lower the Greek and Italian debt by repaying foreign bondholders.

What is needed right now is an instrument that is perceived as concrete solidarity by the South. Nothing less.

3) Once again, the often quoted example of Hamilton is mentioned: “In fact, Alexander Hamilton  adopted this approach more than 200 years ago, when he decided to mutualize the  debts that individual US states had incurred during the Revolutionary War – a  decisive move toward further political integration. Rather than wait for  political union to happen, Hamilton took action that eventually helped the US to  become a full-fledged monetary, fiscal, and political union.”

That is a misplaced example. The debts were mutualised for one short-term purpose, restoring reputation in US bond markets to face the possibility of war against the enemy with all due instruments of financing available.  Very few decades later mutualisation was turned down when some states asked for debt relief.

US debt, taxes and spending became Federal, all data show, only after a civil war, the invention of the train that allowed for mobility, another war, the First WW, to make the US aware of its geopolitical role, and a huge recession where the US President, FDR, showed immense solidarity that allowed citizens (during his second and not his first mandate) to trust in him the power to tax and spend from the center.

What is needed right now is an instrument that can take into account the impossibility of mutualisation of any kind.

What fits the 3 conditions? Only 1 thing. We need austerity to go away. With tax relief on German workers and public investment instead of more primary surpluses with the tax money raised from citizens in the South.

Any distraction from that will make Europe crumble soon rather than later.

One comment

  1. Massimo GIANNINI

    13/05/2013 @ 08:43

    Germany will be compelled sooner or later to accept a) Eurobonds b) some forms of mutualisation of debt. Eurobonds wil have to be used for a) EU budget b) EU projects (that is public investments) c) refinance the sovereign but nation debt. You will have noted that “synthetic” or proxy EU bonds already exist in the ECB budget via its operations. Launching Eurobonds will be just a matter to go beyond the European Stability Mechanism. Appropriate compensation facilities could be set up among countries to take account also of interest rate spreads.


Lascia un Commento

Required fields are marked *.