The Art of the Possible: Or how to blend Eurobonds with Maastricht

Gavyn Davies, in today’s FT (click here) suggests, as we do in our Modest Proposal, that eurobonds are preferable in the fight against the vicious circle facing the eurozone than the current strategy of loaning bankrupt states money they cannot repay under the offered terms. He writes: “[T]he ECB may eventually come to prefer…for the eurozone as a whole to issue jointly-backed bonds which could be used to buy the bonds of the problem economies. This could either be done directly in the secondary bond market, or the ECB could initially conduct the market support operations in the bond market, and then remove the bonds from its balance sheet once the communal bond operation had raised the necessary funds. This could be seen as an expansion of the activities of the European Financial Stability Facility (EFSF), except that it would not wait for countries to be on the brink of insolvency before taking action.” Right on. What Davies’ suggestion is neglecting is the political backlash of a blanket issue of eurobonds by those who fear the inflationary potential of unrestrained EU borrowing on the open markets. This is why we proposed that a limit is introduced on the value of eurobonds issued to buy member-states’ bonds equal to 60% of the latter’s GDP. This limit would allow politicians to support the scheme on the basis that it is entirely consistent with the logic and numbers of the Stability Pact; that is, of Maastricht.