Saturday, March 14, 2009
Never say never again:
On March 11th, EU Parlament lawmakers made their case for a single European sovereign bond.
They "invite the Member States, and in particular those belonging to the euro area, to examine the possibility of a major European loan guaranteed jointly by the Member States".
The case for a single European sovereign bond was made recently by Wolfgang Münchau on the Financial Times.
Yet, the idea of borrowing money via the issue of EU bonds is not new and was first launched by former Commission President Jacques Delors via his 1993 plan for growth, competitiveness and employment. Delors initially wanted EU bonds to fund the European budget. But the majority of member states opposed the idea, fearing it would ultimately increase their expenditure on the Community budget or raise the cost of borrowing for some Member States.
In 2000, then Commission President Romano Prodi re-proposed the idea. A report prepared by a group of financial experts led by Alberto Giovannini explained the technicalities of issuing common bonds to attract foreign capital.
It appears that the benefits of a single European Bond outweigh its costs and the timing is now right on the financial markets as bonds are safe haven and Asian countries may need to diversify away from US Treasuries and dollar.
However the devil is in the details, for which I would consider carefully the above mentioned report by Giovannini. Euro bond can't solve all problems, like national interest spreads and premia, but common, joint and/or coordinated issuance and uses (including recapitalization of banks, European budget, common guarantee funds, EU projects, rescue loans and packages, IMF resources, etc.) could create an efficient and effective bill or bond euro zone market. Different arrangements could then be studied concerning the issuing institution (single issuer) or coordinated agencies and its guarantees. A bond clearing house, i.e., a vehicle for sharing information to improve coordination could also be set up. Securitization of national government bonds should not be construed as a problem. Some of the technicalities and arrangements are the same as for the introduction of the Euro as a common currency.
Update: it appears that some economists are more worried about the status of the EU economy rather than US. They also say that the EU should do more. While these arguments are being debated also by politicians on both sides of the Atlantic, I think that an immediate and pragmatic response could come with the coordinated issuance of EU bonds for appropriate purposes (starting for instance and immediately from the original idea of funding over 120 billions of EU budget, whose resources come in any case annually from treasuries of member states). Then let's see the market reaction...and other purposes could be gradually implemented and extended to. It will show that the creation of the euro, and its bond, was not at all a mistake...