Germany Must Accept Eurobonds or Leave Euro

Published on Spiegel Online International (with the kind permission of Project Syndicate), by Investor George Soros, April 10, 2013.

Despite a period of relative calm last year, the euro crisis is creeping back in 2013. In an essay for SPIEGEL ONLINE, star investor George Soros argues that the situation would improve dramatically were Germany to accept Eurobonds. Absent such acceptance, Berlin should consider leaving the euro zone, he argues … //

… Eurobonds Would Not Ruin Germany’s Credit Rating:  

  • In accordance with the Fiscal Compact, member countries would be allowed to issue new eurobonds only to replace maturing ones; after five years the debts outstanding would be gradually reduced to 60 percent of GDP. If a member country ran up additional debts it could borrow only in its own name. Admittedly, the Fiscal Compact needs some modifications to ensure that the penalties for noncompliance are automatic, prompt and not too severe to be credible. A tighter Fiscal Compact would practically eliminate the risk of default.
  • Thus, eurobonds would not ruin Germany’s credit rating. On the contrary, they would favorably compare with the bonds of the United States, the United Kingdom, and Japan.
  • To be sure, eurobonds are not a panacea. The boost derived from eurobonds may not be sufficient to ensure recovery; additional fiscal and/or monetary stimulus may be needed. But having such a problem would be a luxury. More troubling, is that eurobonds would not eliminate divergences in competitiveness. Individual countries would still need to undertake structural reforms. The European Union would also need a banking union to make credit available on equal terms in every country. The Cyprus rescue made the need more acute by making the field more uneven. But Germany accepting eurobonds would totally change the atmosphere and facilitate the needed reforms.
  • Unfortunately, Germany remains adamantly opposed to eurobonds. Since Chancellor Merkel vetoed the idea, they have not been given any consideration. The German public doesn’t realize that agreeing to eurobonds would be much less risky and costly than continuing to do only the minimum to preserve the euro.

The Case for Germany’s Exit:

  • Germany has the right to reject eurobonds. But it has no right to prevent the heavily indebted countries from escaping their misery by banding together and issuing them. If Germany is opposed to eurobonds it should consider leaving the euro. Surprisingly, eurobonds issued by a Germany-less euro zone would still compare favorably with the bonds of the United States, the United Kingdom and Japan.
  • The reason is simple. Since all the accumulated debt is denominated in euros, it makes all the difference which country leaves the euro. If Germany left, the euro would depreciate. The debtor countries would regain their competitiveness. Their debt would diminish in real terms and, if they issued eurobonds, the threat of default would disappear. Their debt would suddenly become sustainable.
  • At the same time, most of the burden of adjustment would fall on the countries that left the euro. Their exports would become less competitive and they would encounter heavy competition from the rump euro zone area in their home markets. They would also incur losses on their claims and investments denominated in euro.
  • By contrast, if Italy left the euro zone, its euro-denominated debt burden would become unsustainable and would have to be restructured, plunging the global financial system into chaos. So, if anyone must leave, it should be Germany, not Italy.
  • There is a strong case for Germany to decide whether to accept eurobonds or leave the euro zone, but is it less obvious which of the two alternatives would be better for the country. Only the German electorate is qualified to decide.

Not in Germany’s Interest: … //

… (full text).


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Eurozone: Death by a thousand cuts, on Russia Today RT, by Patrick Young, April 09, 2013.

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