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Europe’s Small Steps and Giant Leaps

Issuing Eurobonds essentially amounts to a “Three Musketeers” (all for one and one for all) approach by letting eurozone countries borrow money in solidarity. But, to work, this strategy requires far deeper political integration than European governments are willing to admit.

BRUSSELS – The world was expecting Eurobonds to come out of last week’s Franco-German summit; instead, the eurozone will get economic governance. According to German Chancellor Angela Merkel and French President Nicolas Sarkozy, the great leap forward to the creation of Eurobonds would perhaps be the culmination of that process, but for the moment small steps remain the order of the day. The question, obviously, is whether or not these small steps serve any purpose.

To answer this, we need to go back a little in time. Until this summer, the sovereign-debt crisis was confined to three small countries – Greece, Ireland and Portugal. Spain had succeeded in limiting the spread between its interest rates and those of Germany to about two percentage points.

By mid-July, however, the cost of borrowing for Spain and Italy was nearing four points, and France’s borrowing conditions were rapidly deteriorating. The specter of a full-blown crisis was starting to haunt markets. But the eurozone was not equipped to deal with this. The European Financial Stability Facility, established in 2010, had a lending capacity of a little more than €300 billion – ample for the peripheral countries, but too little to help even Spain alone. Disaster beckoned.

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