Eurozone bonds seen as a mixed blessing

The euro is not as impressive as it once was Keystone

As the financial weakness of several European countries calls their common currency into question, some see the issue of joint eurozone bonds as the answer.

But as Klaus Neusser, a professor of economics at Bern University, explains to swissinfo.ch, while they would benefit indebted countries, states with a healthy financial system would find themselves footing the bill.

Like all bonds, they would be a way to raise new funds to get rid of the debt facing some countries.

The idea of the eurozone bonds is that the 17 countries which share the euro would issue it jointly, thus jointly guaranteeing each other’s debts. The cost to each government – the annual interest to be paid on the bonds – would be the same, regardless of the strength or weakness of their financial system.

swissinfo.ch: As far as issuing bonds is concerned, what is the difference between the Swiss government and the European Commission?

Klaus Neusser: The main difference is that the government in Bern collects taxes, so it has revenues to dispose of to service its debt. You could say the tax revenues are a sort of guarantee. The same goes for the Swiss cantons.
 
But this is not the case with the eurozone bonds – or not yet, anyway.

swissinfo.ch: The European Commission acts as a kind of European Union government. If eurozone bonds were introduced, would it be the Commission which issued them?

K.N.: That’s still not clear. Bonds issued in euros have existed for a long time. But the bonds now being discussed are something different, namely EU state securities.
 
It isn’t clear who exactly would issue them. One option would be that the individual states would do so jointly. Another would be that the Commission would do so itself.

swissinfo.ch: Would that make the Commission into a sort of European government?

K.N.: The right to issue bonds would certainly strengthen it and its president, José Manuel Barroso. But behind the question of who issues them, there is also the matter of a European tax.

swissinfo.ch: Would that mean the start of a common European tax policy?

K.N.: Up to now the individual states have set their own taxes and collected them too. The Commission can’t do that. But I believe that in the long term the Commission has in mind the idea of issuing bonds on the one hand, and collecting taxes on the other.

swissinfo.ch: There’s a lot of argument about this too. But is it about the problematical timing, if eurozone bonds were issued now, or is it the actual notion of these bonds?

K.N.: The first problem is that all the eurozone countries would participate, but countries like Germany and Finland – that’s to say, ones in good financial standing – in the last resort would be the ones liable.
 
After all, there has to be a guarantee that the interest would be paid and that the bonds would be paid back should Italy default.
 
The second problem is the rate of interest. German bonds currently pay the lowest interest in the eurozone, because the risk is seen as being lowest. The lower a country’s financial standing, the higher the interest rate demanded by investors if they are to buy such bonds.
 
If a eurobond were to be issued, the interest rate would be a kind of euro-mixture: higher than Germany currently pays, to be sure, but lower than Italy and Spain are forced to offer – let alone Greece.
 
The consequence of that would be that the Germans would have to pay the higher interest rate too – and that’s one of the reasons why they are against these bonds. But the countries of southern Europe are in favour, because it would relieve their interest bill.

swissinfo.ch: And what is Switzerland’s stance on these eurozone bonds?

K.N.: It’s not a matter of immediate relevance for the Swiss.

swissinfo.ch: Might the Swiss National Bank (SNB)be forced to buy them as part of its measures to maintain the exchange rate of the franc against the euro?

K.N.: The SNB is free to decide what securities it buys to take care of the exchange rate. The only thing is, they must be in euros. To meet its target for the exchange rate, it makes no difference what kind of securities it buys or sells. There is usually a broad spread in such foreign currency reserves.

swissinfo.ch: And private investors?

K.N.: If an investor buys eurozone bonds instead of German or Italian ones, he can’t judge how much risk is involved from each country. After all, he doesn’t know which country the money raised will end up flowing into. But that’s not a problem specifically for the Swiss.

swissinfo.ch: What’s your own opinion of eurozone bonds?

K.N.: Since I am Austrian, I am like the Germans and Dutch and don’t want them introduced. As well as the problems of interest rates and guarantees which we’ve just spoken about, there’s also the fact that having eurozone bonds would lift some of the pressure on the highly indebted countries to be more disciplined about their spending.

Eurozone bonds

If they are ever issued, eurozone bonds would mean that 17 states which use the euro as their common currency would jointly guarantee each others’ debts.

All the governments involved could then borrow on the same basis and at the same cost.

However, the bonds should cover debts equal to no more than 60 per cent of a country’s annual economic output.

Anything beyond that would be the responsibility of the individual state.

The eurozone bond proposal is popular with indebted countries, who see it as a way of helping them get rid of their debts.

It is opposed by financially strong countries, because ultimately they would have to guarantee payment of interest on the bonds and repayment of the capital at the end of the fixed term.

They would also have to pay higher interest for loans than they do at present, and say the bonds would not tackle the structural problems of the weaker countries.

The proposed eurozone bonds should not be confused with the eurobonds which have been in existence for several decades.

These are international bonds denominated in a currency which is not that of the country where they were issued.

They have nothing to do with the euro currency or the euro zone.

The first such eurobonds were issued in 1963 to finance the Italian motorway network.

Eurozone crisis

Several countries in the eurozone are facing crippling debts.

Greece, Portugal and the Irish Republic have all received international help to deal with them.

Those three, and also Italy, Spain and Cyprus have seen their credit worthiness downgraded this year, reflecting concern that they will be unable to pay off their debts.

In July the eurozone countries and the International Monetary Fund agreed to give Greece a second bailout of €109 billion(SFr132), on top of the €110 billion granted a year ago.
 
This Greek bailout  was part of a comprehensive package to shore up the single currency.

The governments also agreed to give the European Financial Stability Fund more powers to help indebted countries.

Among other things, the fund will now be able to buy government bonds and offer credit to struggling states.

(Adapted from German by Julia Slater)