In-debt together?

The debate about issuing so called eurobonds, or e-bonds, - loans with common interest rates across the eurozone - was ignited again on Monday when Professor Peter Bofinger, a member of the German government's panel of independent economic advisors, said that the bonds would stabilize the eurozone.

"Issuing eurobonds would make it clear that the countries in Europe will remain solvent, and that it's just no longer possible to push some countries into a corner and burden these countries with extremely high interest," Bofinger said in an interview with German broadcaster Deutschland Radio.

Eurobonds would be issued to all eurozone countries with the same interest rate, allowing those in financial difficulties to benefit from the collective strength of the bloc.

Germany and France, countries which enjoy relatively good reputations as debtors, oppose e-bonds.

In a speech to the German parliament last week, Chancellor Angela Merkel laid out her criticism of the idea.

"It's really important that we don't make the mistake of collectivizing risks, which would happen with eurobonds," she said. "This is absolutely not a solution. The solution is more harmony and more competitiveness in the EU member states and especially in the eurozone."

Disagreement over costs

At the moment, Germany borrows at a rate of 1.73 percent, but the average borrowing rate across the eurozone is slightly above 3 percent. Some economists say that if eurobonds were introduced, Germany would end up paying more interest.

"There will be a substantial loss of reputation for Germany, and Germany will have to pay more debt for [its] interest," Markus Kerber, a professor of economics at Berlin's Technical University, told Deutsche Welle.

A eurozone bond could cost Germany 17 billion euros ($22 billion) more each year, the German newspaper Frankfurter Allgemeine Zeitung said.

But Bofinger thinks the assumption is flawed that the eurobonds' interest rate would reflect the average national interest rates of individual states.

"The interest is so high in some countries because the risk of default is seen as being so high," Bofinger said. "With a eurobond, the likelihood of a country defaulting is highly unlikely, and so I think it would have much lower interest rates than the average."

Bofinger also said that issuing eurobonds would be a good way of recognizing the austerity measures that are being implemented.

"One has to acknowledge what is being done in Greece, Portugal, Ireland and Spain. These countries, which have really implemented very tough measures to try to stabilize the situation, they would be rewarded by allowing them access to financing with low interest rates," Bofinger said.

Opponents say a collective eurozone debt pool would weaken economic competitiveness, because countries like Germany, which has a very good reputation as a debtor, would share a credit rating with countries that, according Kerber, don't deserve the same rating.

Tarnishing reputations

"Reputation is the result of challenging the markets. If we abolish that system, we make it an anti-market system. We make it an anti-meritocratic system and we give reputation and advantages in terms of interest to countries that don't deserve it," said Kerber.

Distorting competition in this way would destabilize the eurozone in the long term, he added.

"I cannot understand Professor Bofinger's reasoning. Why should non-market conditions for raising funds for fragile countries stabilize the euro?" Kerber said. "In the long run, if you distort competition, the system will break down. There will be a collapse and that collapse will bring down the euro."

German Finance Minister Wolfgang Schaeuble hasn't been as vehement in his opposition to eurobonds as Merkel, but he has said that there should to be more political and fiscal integration before they are introduced. This would mean harmonizing national sacred cows like taxes, retirement policy and labor market legislation.

With a string of important state elections coming up in Germany in 2011, it seems unlikely that Merkel will do an about-turn on the issue of eurobonds, which could be unpopular with the German electorate.

Author: Natalia Dannenberg
Editor: Nancy Isenson