Vox
December 2, 2011Fiscal union is now officially on the European agenda, but the issue of Eurobonds remains controversial. This column argues that the Eurozone needs Eurobills, ie debt of maturities less than a year. Issuing Eurobills – up to 10% of Eurozone GDP – would help with crisis management as well as financial regulation, and monetary policy, while minimising the risks of moral hazard.
Recent events have highlighted the need for stronger coordination of liquidity provision and financial regulation in the Eurozone. Some go further and argue that the crisis demonstrates the need for deeper integration including perhaps fiscal integration and Eurobonds.
Fiscal integration remains controversial because the risks involved are difficult to assess by taxpayers and politicians. Stronger countries are understandably reluctant to accept open-ended commitments that could threaten their own financial stability. Without proper oversight, jointly issued Eurobonds would expose member countries to potentially large moral hazard.
Proponents of Eurobonds, on the other hand, emphasise that common bonds could alleviate the current sovereign debt crisis and reinforce financial stability in the Eurozone. The two sides remain far from agreeing on a course of action.
Yet a cold look at the problem through the lens of economic theory suggests a compromise solution. The introduction of Eurobills – common debt with maturity of less than a year – could provide a large part of the benefits while allowing for significant checks on the risks, both in terms of magnitudes, and in terms of effective control.
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