JUNCKER AND TREMONTI: “E-BONDS WOULD END THE CRISIS” (EuroIntelligence)

This is probably the single most important proposal ever made since the outbreak of the European sovereign debt crisis. The survival of the euro will depend on whether it is accepted.

Writing in today’s Financial Times, Jean-Claude Juncker and Giulio Tremonti are making a specific proposal for a single European bond, to be issued a European Debt Agency (EDA). Each country can issue European bonds up to 40% of GDP – thus well within the Maastricht reference rate of 60%. It would create, over time, a sovereign bond market of similar size to the US treasury market. As a first step, the EDA would finance 50% of member states’ debt issues – but this can be raised to 100% during crises.

The clou of this proposal is the mechanism of the switch between national and European bonds. This is the built-in default mechanism. The EDA could offer countries in trouble the possibility to switch national bonds for E-bonds at a discount, whose size depends on the degree of market stress. That would overcome the problem that secondary market in many EU sovereign bonds are not sufficient liquid during crises. It is worth reading the proposal in full – because it is worked out in detail.

Germany says No

Germany opposes the idea totally – at least so far (the proposal contains some sweeteners that make the idea more attractive for Germany – a relatively low debt-to-GDP ceiling, and the discount option). Wolfgang Schauble said E-bonds would require significant changes to the European treaties (which is true). He said the key to the euro’s survival was not the E-bonds, but fiscal discipline.

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