Eurobonds are likely to increase the risk of joint defaults in the Eurozone

by Wolf Wagner

Vox
December 8, 2011

As government advisors and central bankers race through the different options to save the euro, this column argues that one such proposal, Eurobonds, will actually increase the risk that several Eurozone countries fail together. It shows using basic arithmetic that these bonds, sometimes labelled ‘stability bonds’, may actually be more likely to harm Eurozone stability.

The debate on Eurobonds has received new stimulus in recent weeks with the EU commission's president calling for the introduction of 'stability bonds'. The adoption of such bonds – or some other form of Eurobonds – remains a possible outcome as Germany effectively remains the only large country strictly opposing the idea. The defining property of most Eurobond proposals is a joint liability for government debt issued by Eurozone countries: rather than each member state standing behind its own debt, the idea is that all member states will be jointly guaranteeing the Eurozone debt.

The key rationale behind Eurobonds is that they have the potential to reduce sovereign defaults in the Eurozone. They allow countries that come into troubles to benefit from the strength of other countries. This column argues that while this may indeed reduce the risk of sovereign default in individual countries, the reverse is likely to happen for the risk of a default of a larger number of countries in the Eurozone.

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