The way the Eurozone crisis has gone is that a peripheral country will announce a growing budget deficit and debt. The markets, concerned about the risk of default and the lack of economic growth given the foolish solution of austerity imposed on those countries, then gradually raise borrowing costs. This makes it impossible for those countries to afford to borrow, and they seek bailouts from their Eurozone partners.
If there were a way to smooth out these borrowing costs, it would remove the negative shocks to the system. One excellent suggestion is to pool the risk, to create a bond to pay off debt in the Eurozone guaranteed by all the member countries. This “Eurobond” would make it so Greece or Spain or Italy wasn’t fighting the bond markets all by themselves. It would allow those countries to benefit from Germany’s stronger economy and low borrowing costs, and reduce the spikes in weaker economies that have caused so much trouble. To analogize from our experience, it’s obviously cheaper for the federal government to borrow than it is for, say, Mississippi. It’s a question of leverage.
Perhaps because a big stimulus package isn’t in the offing, France’s new President Francois Hollande has honed in on Eurobonds as one of the key solutions to the crisis.
The Importance of Eurobonds | FDL News Desk
