Which Eurobonds?

The introduction of Eurobonds could be part of the solution to the eurozone's sovereign-debt crisis, if designed properly. Above all, German taxpayers will need some credible reason to believe that 20 years of false assurances have come to an end – that this is the last bailout.

OSLO – Any solution to the eurozone crisis must meet a short-run objective and a long-run goal. Unfortunately, the two tend to conflict.

The short-run objective is to return Greece, Portugal, and other troubled countries to a sustainable debt path (that is, a declining debt/GDP ratio). Austerity has raised debt/GDP ratios, but a debt write-down or bigger bailouts would undermine the long-term goal of minimizing the risk of similar debt crises in the future.

Long-run fiscal rectitude is the only way to accomplish that goal. But it is hard to commit today to practice fiscal rectitude tomorrow. Official debt caps, such as the Maastricht fiscal criteria and the Stability and Growth Pact (SGP), failed because they were unenforceable.

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