Fateful Day for Europe Four Ideas to Save the Common Currency

The euro needs saving. Is Europe up to the task?

The euro needs saving. Is Europe up to the task?


Part 4: Euro Bonds After All?

The idea of bundling euro-zone debt is dead. That, at least, is Merkel's hope. She has long been opposed to the idea and even managed to convince Sarkozy to give up on the idea. Following their meeting in Paris on Monday, the French president said "Germany and France are in complete agreement that euro bonds are in no case a solution to the crisis."

And yet, they are back. According to the Van Rumpuy report seen by Reuters, the European Council president would, once again, like to see the idea of euro bonds discussed. Merkel is not likely to be ecstatic.

But for all of Berlin's efforts to portray euro bonds as a terrible idea -- primarily because they could remove pressure on indebted countries to introduce budgetary reform -- many euro-zone countries remain in favor. And some analysts suggest that, if they were just designed correctly, they could make everybody happy.

John Muellbauer, a professor of economics at Oxford, has proposed the idea of conditional euro bonds. Instead of allowing all euro-zone countries to borrow at the same interest rate under a traditional euro-bond regime, conditional bonds would impose differences based on each country's macroeconomic vital signs.

Say, for example, that interest rates on bonds backed by the entire euro zone were 2 percent. A country like Italy, with a massive sovereign debt load of 120 percent of gross domestic product, could pay a premium over and above that to stable countries like Germany. If that spread were an additional 2 percent, Italy would then be paying 4 percent, much lower than the over 7 percent recently demanded by investors.

Furthermore, such a system could include built-in incentives. Were Italy to make progress on introducing tough budgetary reforms, that spread could drop to 1.5 percent and then, should more progress be made, to 1 percent.

"It seems to me a no brainer," Muellbauer told SPIEGEL ONLINE. It is a system, he says, "where German taxpayers are not going to lose out and the structure is such that the Italians and the Spanish will have incentives to get their house in order."

The idea may not be all that far-fetched. Muellbauer recently presented his conditional euro bond idea to ECB officials. And the November euro bond proposal from European Commission President Jose Manuel Borroso, which was roundly condemned by Berlin, contained three possible types of bonds. One of them looked a lot like conditional euro bonds.


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