Wall Street Journal
December 7, 2011
Angela Merkel is opposed to euro-zone bonds, or collective guarantees for a portion of euro-zone countries' debt. The chancellor's opposition is understandable: We already had de facto euro-zone bonds before the crisis, when the small spread between Greek and German yields reflected an implicit contract to bail each other out in the event of a debt crisis. This encouraged reckless borrowing and spending by some countries, so it is fair to think that turning this contract into an explicit commitment is hardly a solution to the problem of unsustainable government spending.
However, Mrs. Merkel's preferred approach is to give unelected eurocrats the power to reject national budgets. Greater fiscal union is likely to face opposition from a large fraction of the euro zone's population, especially in France, where nationalist and socialist politicians are starting to compare her with Otto von Bismarck. Some are wondering whether Germany, after several failed attempts, will finally unite Europe—and this time without firing a shot.
A different approach is necessary. The current discussion is too focused on the stick and not enough on the carrot. By punishing countries instead of their leaders for violating EU budget constraints, those responsible walk free. A better method would impose fiscal discipline by incentivizing politicians to be fiscally responsible. Euro-zone bonds could be an ideal tool to implement such a system.
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