Can we have euro bonds without cross-country subsidisation? Yes, we can

by Angelo Baglioni and Umberto Cherubini

Vox
October 12, 2011

One of the main objections to the idea of euro bonds is that Germany would be guaranteeing the debt of Greece, among other cross-country subsidies between the core and the periphery. This column argues that this need not be the case.

In the policy debate about euro bonds, it is often argued that they would benefit high-debt countries at the expense of low-debt countries: the latter would pay a higher risk premium on their debt, since the guarantee they provide to other countries would put an expected liability on their budgets (see for instance on this site Manasse 2010, Gross 2011, and Suarez 2011). On the contrary, we believe that it is possible to design euro bonds in such a way that they are able to lower the cost of servicing the public debt for some countries in the Eurozone, without increasing the cost for the others. Moreover, they are likely to give governments an incentive to curb their deficits, thus avoiding any moral hazard effect. In this column, we briefly explain how this can be done (see our working paper Baglioni and Cherubini 2011 for more details).

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