The Wall Street Journal looks here at the increasingly fashionable notion that “Eurobonds” (bonds issued by the euro zone as a whole) are the answer to the currency union’s woes and, for that matter, are an idea worthy of Alexander Hamilton. The whole article is well worth reading, but here is a key extract:
In 1790, the first Treasury Secretary proposed, as part of his First Report on the Public Credit, that the nascent federal government assume the war debts of the original 13 colonies. Congress narrowly approved the idea, thereby saving the states from almost certain insolvency and securing America’s good name in international credit markets.
The eurocracy wants Europe to do the same and make all of its fiscal troubles go away. But there are some basic differences between the U.S. in the Age of Hamilton and the EU in the Age of Hollande. For starters, George Washington’s administration did not assume states’ future debts—only those that were a legacy of funding the war for America’s independence. Hamilton realized that the states had to be responsible for their own future fiscal policies. Some U.S. states went on to overborrow—and fall into bankruptcy—in the 19th century, and on current trajectory insolvency is possible for some of them again. The French and Italians want eurobonds precisely to put Germany on the hook for their future spending.
A second difference is that Hamilton’s assumption plan was based on the conviction that America’s war of independence was a burden for the entire country, one whose costs deserved to be shared equally. By contrast, the debts of Greece, Spain and Italy were incurred domestically to support domestic spending, not as a sacrifice in the name of ever-closer union.
That difference may be as much moral as economic, but it also helps explain why Germany’s Angela Merkel remains adamant in her opposition to the proposal. How many times can the Chancellor, already politically weakened by recent state elections, ask Germans to pay for the indulgence of others?
Ah yes, that pesky democracy thing. Writing in the Daily Telegraph, Liam Halligan explains:
“Eurobonds” …[are]a euphemism for Germany under-writing everyone else’s debts. That would amount, in essence, to fiscal union. It seems to me pretty obvious that, for all the hopes being pinned on such an outcome, it simply isn’t going to happen.
The tacit plan seems to be that Berlin will accept full-on European Central Bank debt monetization in return for a German-directed fiscal union, with powers to raise taxes and make large-scale transfers between countries, while issuing joint eurobonds.
The trouble is that Greece is a democracy, Spain is a democracy. France, the world’s fifth-largest economy and one of the most powerful countries on earth, is a democracy – and a pretty feisty one at that. Are all these countries, their electorates supplicant, their future politicians content, really going to subscribe to and live under, for decades to come, a system based on Berlin telling them how much they can borrow and spend? I don’t think so.
At this point in this saga, I would not rule out at least the possibility that the euro zone’s oligarchs might try to pull off such a stunt. If they did, markets would probably cheer, but for how long?