Europe’s Futile Search for Cheaper Money

BRUSSELS – Various forms of common “European bonds”, more precisely eurobonds, have been proposed recently as a way out of the current euro crisis, with proponents stressing the promise of lower borrowing costs. But this seems mostly to be wishful thinking.

To see why, one needs only to reflect on the longer-term benefits that one might expect from such bonds. Would European bonds carry lower interest rates than the average rates for national bonds?

Proponents of European bonds argue that they would create a much larger and more liquid market than those for national bonds. But this advantage is likely to be limited, a potential savings of a few tenths of a basis point, given that the interest rates on similar, high-quality sovereign bonds – such as those issued by Germany and Austria – differ by only this amount.

Another purported advantage of European bonds could be risk pooling: if the risks that individual eurozone members experience payment difficulties were not too dissimilar – and not too closely correlated – joint issuance of bonds should, in principle, reduce credit risk for European bonds relative to the average risk of national bonds.