Euro Bonds: An Idea Whose Time Has Come?

    Even with yesterday's help by all the central banks there is still some serious concern. For one thing the new infusion into Europe of dollars while helpful certainly doesn't cure the disease. And some are no doubt reading it as an ill omen that such actions are necessary in the first place. After all the effort echos the financial crisis that started in late 2007 when the Federal Reserve opened up dollar lending programs with other foreign central banks. In 2010 when European troubles caused new stresses in short-term funding markets the credit lines were reopened.  Those lines expired last month so the need to reopen may bode ill.

   What is to be done about Europe? There has been different ideas put out there, one that was kind of being hinted at out of Germany in recent weeks was to let Greece default; some have even suggested booting Greece from the EU. Fact is though as much as Germans gripe about helping Greece, Spain, or Italy-why should we have to pay for their spendthrift ways-to allow these EU countries to fail would be cataclysmic, especially Italy(however if Greece were to fall, Spain and then Italy would be next). For her part, German Chancellor put this talk officially to bed this week.

   In any case as Joseph Stiglitz points out, in fact both Spain and Ireland had budget surpluses going into the crisis so that ideology-the good worker ants saved enough to eat over the winter the other ants partied and deserve their fate is erroneous on its face.

   One idea that is of interest is the idea of Euro bonds, which are now being taken seriously by Jose Manuel Barroso, president of the European Commission-which proposes EU legislation-announced Wednesday that the commission would soon put forward options for such bonds. Now, no doubt, that is a long way from actually issuing them-and doing so would take time which Europe hasn't got-but it will place the idea officially before governments.

    The virtues of joint-bond issues is that it would cut borrowing costs for most members of the 17-nation monetary union, which collectively has lower public debt and lower deficits than the U.S. They could even resolve the euoro zone's debt crisis, or at least provide the flexibility to do so.

    The knock on it besides the one we touched on above-it would take some time to implement when the EU has no time-are the usual suspects: the self-righteous feeling that we have saved and they have been irresponsible so why should we help them and make ourselves poorer, ignoring the fact that if the EU periphery countries are not helped everyone in Europe and most in the world will become poorer.

    Specifically the concerns is that it will "delay incentives for action by weak economies."

    "Bloat overall debt and damage the credit standing of strong economies."

    "Deepen EU divisions because of the bonds unpopularity."

     For more please see pg. A9 of today's Wall Street Journal (September 16, 2011).

     As to the concern on delayed incentives to action that refers to the famous austerity packages that the weakened economies are supposed to pass in their parliaments-and engender such huge protests. The complaint is question begging as why do we want imposed austerity right now which will only depress these economies and their consumer demand further?

    The concern over damaging the credit standing of the strong economies is at least an understandable concern. And there is no question the idea will be very unpopular in healthy countries like Germany.

     One European official says that euro-bond supporters can be divided into 3 categories: officials from weak economies who want Germany to bail them out; European federalists who may not have thought through the economics but see them as an opportunity to push for closer integration; and banks and other investors who want bad investments paid in full.

     For the second type, European federalists, listen to Valerie Pecresse, spokeswoman for the French government who said this week: "Euro bonds are for us the end of a process of consolidation in the euro zone, because sharing debt also requires the convergence of our budget policies.