Eurobonds in pictures

Ben Chu

I did an analysis piece on Monday that examined the eurobonds proposal put forward by the Bruegel Institute and thought it might be useful to link to the paper itself and some of the graphics it uses to outline the argument.

Bruegel proposes that the eurozone should collectively guarantee the borrowings of every member state up to 60 per cent of their GDP (which was the original limit set out in the 1992 Maastricht Treaty). Any borrowing on top of that should be entirely their own responsibility. Here’s how that would break down at the moment:

eurobonds1 Eurobonds in pictures

So some states – Finland, Slovakia etc – would have all their debt guaranteed by the eurozone. Others – Austria, Spain – would have only a small proportion of debt not guaranteed collectively. And some – Italy, Greece – would have a large pile of debt uncovered by the guarantee.

So here’s the point: those with “red”, ie uncovered debt, would pay a higher interest rate on that chunk of their borrowing. Why? Because the markets would charge them a higher rate because it’s riskier. And because the interest rate would be higher, the countries would have an incentive to bring it down.

This shows how a normal interest rate works:

eurobonds2 Eurobonds in pictures

And this shows how eurobonds would work:

eurobonds3 Eurobonds in pictures

It’s an attractive theory. And it answers the concerns of German politicians that eurobonds would mean profligate states getting a free ride on the back of German creditworthiness. But the trouble is that the word “eurobonds” has become such a bogey term in the German political discourse that Breugel’s idea, even though it provides for fiscal discipline, has not made much headway.

It’s a shame because the price Germany will pay for a disorderly collapse of the eurozone is likely to be extremely high. I quoted a paper in my article by Stephane Deo of UBS, which puts the cost at up to 25 per cent of GDP in the first year. Now that sounds very high – and anyone who wants to pick holes in the paper can find it here. But there will certainly be severe costs for Germany if the euro unravels. The question Germans need to ask themselves is this: Are eurobonds (with disciplinary safeguards) worse than the demise of the eurozone?

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  • greggf

    Interesting charts Ben, I must look closely at them.
    However I think the unspoken argument now is about introducing (some) QE into the EZ to aid Greece etc. 
    Geitner’s proposals and most UK commentators seem to favour such action but, of course the Germans and a few others are resolutely against it.

  • frenchderek

    Interesting piece form the Bruegel Institute. However, it (and you, by extension) assumes that public debt is the cause of the deficit problems. Hans-Wezrner Sinn, in another paper on (“How to rescue the Euro: Ten Commandments”) argues that private debt is equally to blame. 

    By this view Germany, before this Recession started, and Ireland afterwards, have both shown that reducing wage and price levels is the key. The real problem facing Greece, et al is lack of competitiveness in the private sector, leading to continuing current account deficits. In sum, Eurobonds are not needed, nor should they be encouraged. But harsh cuts are, and should be!

  • frenchderek

    Apologies: gave a wrong address for Sinn’s paper. It is at

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