Towards a Stable Monetary Union: What Role for Eurobonds?
AbstractThis paper investigates the role that Eurobonds could play in making EMU stable in the long run. We establish that EMU’s budgetary problems are not only caused by lack of budgetary discipline, but also by the large and sudden fiscal deterioration during the financial crisis. This type of shock can never be fully ruled out. EMU member states appear more vulnerable in this situation than countries with their own currency, and risk getting caught in a self-fulfilling spiral of increasing interest rates. This presents a strong case for some type of rescue mechanism. We establish that neither the EFSF/ ESM nor the ECB form the ideal backstop, and that Eurobonds potentially offer a more stable solution, but at the price of important moral hazard problems. All existing Eurobond proposals therefore seek a balance between stabilisation and moral hazard, typically through retaining some degree of market discipline. Our Eurobond proposal improves the trade-off between stabilisation and moral hazard by using Eurobonds themselves to further enforce budgetary discipline. Even then, however, EMU governance has to be strengthened substantially and debt levels have to converge before Eurobonds can be introduced. Therefore, our Eurobond proposal could only serve as the capstone of EMU.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 379.
Date of creation: May 2013
Date of revision:
Eurobonds; sovereign bond spreads; fiscal risk-sharing; Economic and Monetary Union;
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
- H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-06-04 (All new papers)
- NEP-EEC-2013-06-04 (European Economics)
- NEP-MAC-2013-06-04 (Macroeconomics)
- NEP-OPM-2013-06-04 (Open Economy Macroeconomic)
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