Collective Conscious

Appar­ently I’m just a year too early. On Eurobonds, Ryan Avent:

FOR a nice look at some of the euro-​​zone solu­tions being mooted see this piece in the cur­rent edi­tion of The Econ­o­mist. It includes a bit on the pro­posal for an issuance of eurobonds:

Rein­forc­ing Europe’s bank­ing system—the third task for its harassed policymakers—will be the job of national reg­u­la­tors fol­low­ing the results of the stress tests. But even if indi­vid­ual banks are recap­i­talised, the dan­ger remains that a dodgy sov­er­eign can drag down its banks. One answer to that could be some form of Euro­pean fis­cal back­stop through the issue of “Eurobonds” under­writ­ten by the cur­rency area’s tax­pay­ers. The EFSF falls short of this because its back­ing from the euro-​​area states is not “joint and sev­eral”; each coun­try is respon­si­ble for its share of the guar­an­tees that lie behind the EFSF’s issuance, but not for the whole amount.

The rem­edy of Eurobonds may be log­i­cal, pro­vid­ing the mon­e­tary union with the fis­cal sup­port it needs. But it looks a solu­tion too far, polit­i­cally. North­ern cred­i­tor coun­tries can now bor­row cheaply and choose to limit their expo­sures to other euro-​​zone mem­bers. Per­suad­ing their elec­torates to sign up for unend­ing fis­cal sub­si­dies would tax any leader.

Tyler Cowen com­ments and deploys a use­ful analogy:

I can imag­ine a Ger­man leader say­ing to her cit­i­zens: “We need to pay this one-​​time clean-​​up cost, hold your nose and sup­port it.” (Actu­ally maybe I can’t imag­ine that, but that’s another story.) I can­not imag­ine such a leader say­ing “From here on in, we’re in the same boat with them.” The lat­ter seems to be like too much affil­i­a­tion for anyone’s com­fort, and on the back Greek end the asso­ci­ated long-​​term fis­cal restric­tions would ran­kle to say the least.

Imag­ine that you had an insol­vent rela­tion of uncer­tain future cred­it­wor­thi­ness. You could either make a one-​​time trans­fer of $10,000, to help pay off a debt, or co-​​sign a mort­gage. Wouldn’t the lat­ter be psy­cho­log­i­cally harder to do, even if it involved a smaller expected sub­sidy in real terms?

Mr Cowen is right, but the crit­i­cal thing to remem­ber here is that the deci­sion has already been taken. The point at which euro-​​zone lead­ers said, “From here on in, we’re in the same boat with them”, was back when the euro zone was cre­ated. That boat has sailed.

What has hap­pened now is that Euro­peans have been con­fronted with the impact of their pre­vi­ous deci­sion to all hop in the same boat. If cit­i­zens of core economies are unhappy with the idea of indef­i­nitely shar­ing a boat with the Greeks and Ital­ians, then what they’re opt­ing for is not sim­ply the choice to avoid issuance of a eurobond, it’s an end to the euro zone.

Either the Euro­peans are will­ing to fight to keep their union or they aren’t. If they aren’t, they’ll lose it; it’s as sim­ple as that.