Eurobonds: Three Lessons from China’s “Debt Centralization/Decentralization” Experience

Eurobonds, dubbed as Coronabonds in the context of the current coronavirus crisis, are being hotly debated among the euro area member states amid the COVID-19 pandemic. The debate is in many ways a retread of the euro area sovereign debt crisis of 2011–2012. As China’s “debt centralization/decentralization” experience is comparable with the introduction of Eurobonds in the European Union (EU) in terms of institutional mechanism design, we review our previous series of studies of China’s “debt centralization/decentralization” experience to shed some light on the Eurobonds debate. We obtain three key lessons. First, the introduction of Eurobonds in EU is likely to soften the budget constraint of the governments of the euro area member states. Second, it is also likely to strengthen the moral hazard incentives of the governments of the euro area member states to intentionally overstate their budget problems. Finally, the magnitudes of the moral hazard effects generated by the introduction of Eurobonds in EU are likely larger than their respective counterparts in China.