A Decisive Action Plan: Eurobonds
Here at home, the U.S. issues Treasury debt that represents all of the states and territories Washington governs. Although U.S. states operate separately and oversee independent state budgets, they’re bound to the federal government in countless ways, including taxes, military, law enforcement, transportation, education, parklands, energy and environment.
And now is the time for Europe to put a similar vehicle into action.
There’s an old proverb about how “my brother’s warts are my warts,” and if the eurozone model wants to win the test of viability, then this approach is the best option. At this point, the whole is greater than the sum of the parts. The refinancing of Europe should be all-inclusive, not only as a way to rekindle the spirit of the creation of the eurozone, but also to deliver on the promise of this regional endeavor to galvanize the continent as one for all and all for one.
To that end, the idea of a pan-eurobond now becomes more than just a concept. The issuance of a vast refinancing effort to the tune of $2 trillion euros, with a follow-on offering of another $1 trillion euros, provides, in my view, the solution that cauterizes the bleeding of fiscal sovereignty. And it would bring down the hammer on the negative psychological pit felt by European citizens and investors.
Think about how it feels to refinance your house from 7% to 4% in today’s mortgage market, assuming you qualify for the loan. Most borrowers would love the opportunity to drastically reduce their biggest monthly budget outlay. But to do so, you need a co-signer. Aside from the International Monetary Fund, Germany is the lender of last resort for Europe’s troubled nations if the intent is to maintain the eurozone in its present state. Germany would have to be the cornerstone guarantor of such a bond issue.
Of course, to achieve the kind of results that global equity markets can believe in, such a deal must be offset with mandatory balanced-budget amendments for all participants, or else Germany won’t go for it. And heavy monetary fines also should be applied for slippage in adhering to newly crafted terms of fiscal obedience.
Starting a New Day
But the silver bullet right here and now is to call in all high-yield sovereign debt and refinance the outstanding sums at today’s interest rates of 1.5% to 2.5% for AAA-rated government bonds. In doing so, billions of euros spent on interest expense are eliminated overnight — and a new day begins for the region.
By issuing a massive eurobond offering at, say, 2% with a triple-A rating, the euro currency can be devalued on an orchestrated basis by central banks to boost exports without pushing up interest rates. Keeping the euro artificially high is stifling exports, but at the same time, that action is being defended so that sovereign bond rates within weaker nations won’t spike to double digits.
The value of the euro needs to come down to spur export trade of the region’s goods and services, and to get GDP growth back above 3%. Because ultimately, Europe has to grow its way out of the mess it’s in — not just to create jobs, but also to generate enough tax revenue to pay down newly minted eurobonds.
The underpinning of this argument lies in a firm understanding by all member nations that they’re collectively sharing the pain for the long-term gain. Restoring growth comes at a price of widespread commitment and sacrifice in the form of a renewed work ethic and controlled government spending.