The outcome of the European Summit earlier this month from an Irish perspective has been very positive given, in particular, the interest rate reduction with respect to bailout terms.
The summit did not establish an agreement on the introduction of EuroBonds, joint guarantees for sovereign debt, despite being a vaunted proposal in advance of the talks. Efforts for Ireland to return to the bond markets by 2013 will depend largely on an anticipated recovery in confidence in Ireland’s economic position.
Clearly the introduction of EuroBonds is something that Ireland would be likely to benefit strongly from in terms of raising essential funds. An alternative mechanism speculated about may instead involve an approach where Irish sovereign bonds would be guaranteed by the EU, which could be deemed to be more flexible. However, we are at a crossroads in terms of the future economic direction of the Eurozone and a better long-term resolution may indeed be the introduction of EuroBonds.
There are many critics of the proposal who say that this would initiate a “transfer union” whereby stronger countries would subsidise weaker ones with all the moral hazard considerations that this would imply – e.g., incentives for some countries to be fully fiscally responsible may diminish, in theory. This may be particularly felt if a medium-to-large member of the Eurozone elected a populist, large-spending Government in a General Election campaign, the excesses of which could objectively be perhaps seen as being indirectly paid for by more prudent nations. There is a fulcrum of the question that smaller and more vulnerable member states may have to consider seriously in the proposal with respect to EuroBonds. Pooling more economic sovereignty in tandem with the introduction of Eurobonds may be a gesture that would solidify further market confidence in the long-term viability of such bonds, should they be introduced. This would be not so much a question of taxation rates but could possibly involve more co-operation on the extent to which member states agree to caps with respect to future budgetary expenditure. It is clear that a balance would need to be struck between the extent of economic independence held individually by member states and the need for increased co-alignment at Eurozone level. At the very least, a further lever to guarantee further enhanced, economic co-operation, to whatever degree this may take, would seem to be a likely proposal preceding serious consideration of EuroBonds as a measure.
Criticisms that EuroBonds would lead effectively to a “transfer union” may prove to be somewhat superfluous. The Eurozone crisis has shown that all member states are too intertwined already in this respect. The question may not be whether we could have a “transfer union”, but rather what type of “transfer union”, direct or merely indirect, we will eventually see emerge, at least for a given duration of time. The benefits of attempting to ensure Triple A-rated sovereign bonds that all Eurozone members could avail of infer other tangential, ripple positives for with respect to the liquidity of the financial system, the aiding of corporate debt financing etc., and therefore EuroBonds ought to be a prioritised, primary consideration among EU member state Governments in the months ahead.
