Europa no necesita esperar a Alemania.
“El tamaño importa. Esa es la lección a sacar a partir del debate de Washington sobre el techo de la deuda y su rebaja en la calificación crediticia soberana por Standard & Poors, ninguno de los cuales ha conducido al alza los rendimientos de los Bonos de EE.UU.. También es una lección a ser tomada en cuenta, el caso de Japón, que combina los más bajos rendimientos de los bonos del mundo con uno de sus mayores saldos de deuda pública.”
Europe need not wait for Germany
Size matters. That is the lesson to draw from Washington’s debt ceiling debate and the downgrade of its sovereign credit rating by Standard & Poor’s, neither of which drove up US bond yields. It is also the lesson to draw from Japan, which combines the world’s lowest bond yields with one of its largest public debt stocks.
This lesson has a plain implication for eurozone countries: they should pool their debts – with or without Germany’s participation. The benefits from creating a debt market of a size to rival those of the US and Japan would clearly outweigh the costs.
Size underpins the affordability with which these states can borrow. The total stock of US government securities outstanding is $9,500bn (€6,600bn). For Japan the figure is Y875,000bn (€7,900bn). Even adjusting for the share of obligations held by the two countries’ public sectors (especially Japan), the tradable stock is enormous. Indeed, it is virtually impossible for investors to avoid these bonds. So they do not: they are currently willing to fund Washington for 10 years at 2.3 per cent and Tokyo at 1 per cent a year.
Compare this with Europe’s nationally fragmented sovereign debt market. At the end of 2010, Italy had €1,500bn of bonds outstanding; Germany, €1,400bn; France, €1,300bn. (UK debt securities amounted to £960bn, or €1,100bn.) These are still sizeable markets. But investors can abandon them much more easily than they can US or Japanese bonds. Put differently, a given size of investor outflow from a European country’s bonds will be far more disruptive than from bigger markets.
This has two effects. One is to make most, if not all, European states pay higher yields than they would as a single entity. The other is to make them far more vulnerable to market panic once investors begin to worry about refinancing risk. That, more than anything, accounts for the toppling of Irish and Portuguese debt markets and contagion to Spanish and even Italian and French bonds.
When such panic threatens, only draconian fiscal steps can reassure markets, such as those the UK took pre-emptively last year, and eurozone members have been forced to take since. But since these depress the economy, they are far from certain to work. Prolonged stagnation worsens public debt burdens and undermines creditworthiness as effectively as fiscal incontinence.
If you are big enough, however, this self-fulfilling dynamic can be put in reverse. The US and Japan retain fiscal space for short-term demand stimulus. They can use this fiscal space to restart growth, which would in turn improve the fiscal outlook.
This option is also available to eurozone countries, if they choose to avail themselves of it. Replacing all national sovereign bonds (although not loans) with common eurobonds would create a market worth €5,500bn. It would be backed by governments that together owe less debt, run a lower combined deficit and have greater tax-raising capacity than the US and Japan. It would almost certainly lead to lower yields than the current eurozone average and virtually eliminate the possibility of a bond buyers’ strike.
So what is the eurozone waiting for? The formal answer is that since eurobonds require joint and several guarantees, they are politically unfeasible. Also – so the argument goes – they are economically risky, since prudent and profligate states would pay the same yields, and since they add to the liabilities of core countries that still enjoy relative safety. But these objections are less impressive than they seem.
There are all sorts of ways to limit the joint guarantees’ riskiness. Total Eurobond issuance could be decided by a suitable supermajority. National constitutions could enshrine priority of Eurobond obligations. The stock of common debt could be capped, for instance along the lines of the “blue” (common) and “red” (national) bonds proposed by Bruegel, the think-tank. Debt service costs could easily be differentiated by charging states as a function of their borrowing share.
The true answer is that Europe is waiting for Germany, whose public is allergic to anything like a “transfer union” and whose leaders think the state would pay higher yields on eurobonds than Bunds.
The solution is to leave Berlin behind. Take the eurozone without Germany and its most like-minded partners – the Netherlands, Austria, Finland and Slovakia. Also exclude Greece, which in any case needs special treatment. The remaining 11 countries can create a €3,500bn bond market with macroeconomic figures only marginally worse than those for the eurozone as a whole.
There is no economic hindrance to gaining the advantages of size in this way, nor any insurmountable legal obstacles. Willing states presumably would need to sign a new treaty that was compatible with their duties in respect of monetary union as set out in the Lisbon treaty. This need not run afoul of the “no bail-out” clause: to agree to borrow jointly is not to assume another country’s debt.
That leaves the politics. It would fly in the face of Brussels etiquette for a subset of the eurozone to go it alone. But it is no less contrary to the European spirit for those willing to pool sovereignty to protect their well-being to be held up by German recalcitrance. This would be justified if Berlin had to pay for the project – but the point is that it would not.
How would such a move go down in Germany? Economically, Berlin may find its borrowing advantage eroded if investors see an alternative euro-denominated bond market that is bigger and economically attractive. Politically, voters may fear being left behind by European integration even more than they fear becoming the paymasters of Europe. If so, the power is really in the hands of the eurozone’s other members. They should use it.