Insulating the financial sector from the European debt crisis: Eurobonds without public guarantees

by Thorsten Beck, Harald Uhlig & Wolf Wagner

Vox
September 17, 2011

While almost everyone is agreed that the Eurozone is in crisis, there is much less agreement about how to stop it. This column argues that policymakers should move beyond the current proposal for Eurobonds – something the authors label as “economically wrong and politically indefensible”. Instead, they call for “synthetic Eurobonds” that would insulate the financial sector – and much of the economy – from the current debt crisis.

The Eurozone is in crisis, with several governments and banks likely to lose access to market funding. The crisis, however, has (at least) two layers, a crucial point sorely missed in the current policy debate:

• There is a sovereign debt crisis; and
• there is the financial sector crisis.

While they are interconnected, each requires different perspectives and tools for their resolution.

The failure to stem the crisis is due to the single-minded focus of political leaders on containing sovereign default risk as their key objective. By contrast and on purpose, our perspective here is instead on the functioning of the financial sector and tackling the financial sector crisis.

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