Contributed To Hellasfrappe By Protesilaos Stavrou
In his last speech in front of the European Parliament, the President of the European Commission, Jose Manuel Barroso, promised to bring plans for eurobonds. For what he called “stability bonds”. These eurobonds will be jointly issued and separately guaranteed by all euro member-states. In addition they will be accompanied by a series of institutional reforms, transferring more power to European institutions, while offering the ability to the Commission to impose penalties on states that fail to comply with the budget rules. Among these penalties will be the imposition of sanctions, the suspension of community funding and even the temporary withdrawal of voting rights.
The latest proposal of Barroso is already presented, by various interest groups, as the ultimate panacea to the maladies of the eurozone, without anyone questioning the economic and political implications of it and without any criticism being made on the failure to condemn the narrow-sighted budget rules themselves, that have proven to be insufficient and in combination with the structural flaws of the euro, function as a straitjacket for many countries.
A careful examination of what Barroso actually spoke of, proves that the “stability” bonds will produce adverse effects, effectively leading to instability and deterioration. After all the “Stability” and “Growth” Pact, the package of budget rules Barroso and the rest speak of, has apparently contributed to the current instability and recession. The mere label of a proposal cannot alter its substance. Both politically and economically, the Barroso proposal will only succeed, if implemented, in adding more pressure to the unraveling euro edifice.
From an economic perspective the Barroso eurobonds have certain degenerative features. They envisage the pooling of the debts of every eurozone member-state. In practice this means to bring together the debts of states like Greece and combine them with those of states like Germany, to produce a single bond that will yield a weighted average interest rate. This rate will be higher than what Germany currently enjoys and lower than what Greece could afford under the given conditions. In theory this might appear as an act of solidarity by European partners, who are willing to assist each other. Reality is quite different though since if countries like Germany who use their excellent credit rating and ability to borrow cheaply, to contribute to bodies like the EFSF, the region’s bail out fund, suddenly face increasing borrowing costs, this extra cost will be rolled over to everything related to these states, effectively counter-balancing whatever benefits deficit states could enjoy. In other words, reaching an average by bringing at a worse position the healthier parts of the eurozone, is not a prudent policy as it will effectively make every state worse off, by reducing whatever surpluses may exist.
Also considering that higher borrowing costs for core eurozone countries will further deteriorate their public finances, one might easily conclude that the pressures on their credit rating will increase effectively leading to eventual downgrades. Such downgrades for countries like Germany and France who are the main pillars of the EFSF and other funds, will imply that all dependent bodies will lose credibility, thus their guarantees will lose value, leading to an erosion of confidence by the markets. To cut the long story short, credit rating downgrades of the eurozone’s core countries, could mean that whatever is currently in place might implode due to increased market pressures, making every member-state worse off.