Germany’s Choice

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The euro crisis has already transformed the European Unionfrom a voluntary association of equal states into a creditor-debtorrelationship from which there is no easy escape. The creditors stand to loselarge sums should a member state exit the monetary union, yet debtors aresubjected to policies that deepen their depression, aggravate their debtburden, and perpetuate their subordinate position. As a result, the crisis isnow threatening to destroy the EU itself. That would be a tragedy of historicproportions, which only German leadership can prevent.

The causes of the crisis cannotbe properly understood without recognizing the euro’s fatal flaw: By creatingan independent central bank, member countries have become indebted in acurrency that they do not control. At first, both the authorities and market participantstreated all government bonds as if they were riskless, creating a perverse incentive forbanks to load up onthe weaker bonds. When the Greek crisis raised the specter of default,financial markets reacted with a vengeance, relegating all heavily indebtedeurozone members to the status of a Third World country over-extended in aforeign currency. Subsequently, the heavily indebted member countries weretreated as if they were solely responsible for their misfortunes, and thestructural defect of the euro remained uncorrected.

Once this isunderstood, the solution practically suggests itself. It can be summed up inone word: Eurobonds.

If countries thatabide by the EU’s new Fiscal Compact were allowed to convert their entire stockof government debt into Eurobonds, the positive impact would be little short of themiraculous. The danger of default would disappear, as would risk premiums.Banks’ balance sheets would receive an immediate boost, as would the heavilyindebted countries’ budgets.

Italy, for example,would save up to 4% of its GDP; its budget would move into surplus; and fiscalstimulus would replace austerity. As a result, its economy would grow, and itsdebt ratio would fall. Most of the seemingly intractable problems would vanish into thin air.It would be like waking from a nightmare.

In accordance withthe Fiscal Compact, member countries would be allowed to issue new Eurobondsonly to replace maturing ones; after five years, the debts outstanding would begradually reduced to 60% of GDP. If a member country ran up additional debts,it could borrow only in its own name. Admittedly, the Fiscal Compact needs somemodifications to ensure that the penalties for noncompliance are automatic,prompt, and not too severe to be credible. A tighter Fiscal Compact would practicallyeliminate the risk of default.

Thus, Eurobonds wouldnot ruin Germany’s credit rating. On the contrary, they would compare favorablywith the bonds of the United States, the United Kingdom, and Japan.

To be sure, Eurobondsare 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 aproblem would be a luxury. More troubling, Eurobonds would not eliminatedivergences in competitiveness. Individual countries would still need toundertake structural reforms. The EU would also need a banking union to makecredit available on equal terms in every country. (The Cyprus rescue made theneed more acute by making the field even more uneven.) But Germany’s acceptanceof Eurobonds would transform the atmosphere and facilitate the needed reforms.

Unfortunately,Germany remains adamantlyopposed to Eurobonds. Since Chancellor Angela Merkel vetoed the idea, it hasnot been given any consideration. The German public does not recognize thatagreeing to Eurobonds would be much less risky and costly than continuing to doonly the minimum to preserve the euro.

Germany has the rightto reject Eurobonds. But it has no right to prevent the heavily indebtedcountries from escaping their misery by banding together and issuing them. IfGermany is opposed to Eurobonds, it should consider leaving the euro.Surprisingly, Eurobonds issued by a Germany-less Eurozone would still comparefavorably with those of the US, UK, and Japanese bonds.

The reason is simple.Because all of the accumulated debt is denominated in euros, it makes all thedifference which country leaves the euro. If Germany left, the euro woulddepreciate. The debtor countries would regain their competitiveness. Their debtwould diminish in real terms and, if they issued Eurobonds, the threat ofdefault 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 theeuro. Their exports would become less competitive, and they would encounterheavy competition from the rump eurozone in their home markets. They would alsoincur losses on their claims and investments denominated in euros.

By contrast, if Italyleft the eurozone, its euro-denominated debt burden would become unsustainableand would have to be restructured, plunging the global financial system intochaos. So, if anyone must leave, it should be Germany, not Italy.

There is a strongcase for Germany to decide whether to accept Eurobonds or leave the eurozone,but it is less obvious which of the two alternatives would be better for thecountry. Only the German electorate is qualified to decide.

If a referendum inGermany were held today, the supporters of a eurozone exit would win hands down. But more intensive considerationcould change people’s mind. They would discover that the cost to Germany ofauthorizing Eurobonds has been greatly exaggerated, and the cost of leaving the eurounderstated.

The trouble is thatGermany has not been forced to choose. It can continue to do no more than theminimum to preserve the euro. This is clearly Merkel’s preferred choice, atleast until after the next election.

Europe would beinfinitely better off if Germany made a definitive choice between Eurobonds anda eurozone exit, regardless of the outcome; indeed, Germany would be better offas well. The situation is deteriorating, and, in the longer term, it is boundto become unsustainable. A disorderly disintegration resulting in mutualrecriminations and unsettledclaims would leave Europe worseoff than it was when it embarked on the bold experiment of unification. Surely thatis not in Germany’s interest.

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关键词：Germany German Choice Many Any voluntary position already Choice escape

The euro crisis has already transformed the EuropeanUnion from a voluntary association of equal states into a creditor-debtorrelationship from which there is no easy escape. The creditors stand to loselarge sums should a member state exit the monetary union, yet debtors aresubjected to policies that deepen their depression, aggravate their debtburden, and perpetuate their subordinate position.

The causes of the crisis cannot be properly understoodwithout recognizing the euro’s fatal flaw: By creating an independent centralbank, member countries have become indebted in a currency that they do notcontrol. At first, both the authorities and market participants treated allgovernment bonds as if they were riskless, creating a perverse incentive for banks to load up on the weakerbonds. When the Greek crisis raised the specter of default, financial marketsreacted with a vengeance,relegating all heavily indebted eurozone members to the status of a Third Worldcountry over-extended in a foreign currency. Subsequently, the heavily indebtedmember countries were treated as if they were solely responsible for theirmisfortunes, and the structural defect of the euro remained uncorrected.
Once this is understood, the solution practicallysuggests itself. It can be summed up in one word: Eurobonds.If countries that abide by the EU’s new Fiscal Compactwere allowed to convert their entire stock of government debt into Eurobonds,the positive impact would be littleshort of the miraculous. The danger of default would disappear, as wouldrisk premiums. Banks’ balance sheets would receive an immediate boost, as wouldthe heavily indebted countries’ budgets. In accordance with the Fiscal Compact, membercountries would be allowed to issue new Eurobonds only to replace maturingones; after five years, the debts outstanding would be gradually reduced to 60%of GDP. If a member country ran up additional debts, it could borrow only inits own name. Admittedly, the Fiscal Compact needs some modifications to ensurethat the penalties for noncompliance are automatic, prompt, and not too severeto be credible. A tighter Fiscal Compact would practically eliminate the riskof default.

To be sure, Eurobonds are not a panacea. The boost derived from Eurobondsmay not be sufficient to ensure recovery; additional fiscal and/or monetarystimulus may be needed. But having such a problem would be a luxury. Moretroubling, Eurobonds would not eliminate divergences in competitiveness.Individual countries would still need to undertake structural reforms. The EUwould also need a banking union to make credit available on equal terms inevery country. (The Cyprus rescue made the need more acute by making the fieldeven more uneven.) But Germany’s acceptance of Eurobonds would transform theatmosphere and facilitate the needed reforms.

The German public does not recognize that agreeing toEurobonds would be much less risky and costly than continuing to do only theminimum to preserve the euro.Germanyhas the right to reject Eurobonds. But it has no right to prevent the heavilyindebted countries from escaping their misery by banding together and issuingthem. If Germany is opposed to Eurobonds, it should consider leaving the euro.Surprisingly, Eurobonds issued by a Germany-less Eurozone would stillcompare favorably with those of the US, UK, and Japanese bonds.
The reason is simple. Because all of the accumulateddebt is denominated in euros, it makes all the difference which country leavesthe euro. If Germany left, the euro would depreciate. The debtor countrieswould regain their competitiveness. Their debt would diminish in real termsand, if they issued Eurobonds, the threat of default would disappear. Theirdebt would suddenly become sustainable.
At the same time, most of the burden of adjustment wouldfall on the countries that left the euro. Their exports would become less competitive,and they would encounter heavy competition from the rump eurozone in their homemarkets. They would also incur losses on their claims and investmentsdenominated in euros.


There is a strong case for Germany to decide whetherto accept Eurobonds or leave the eurozone, but it is less obvious which of thetwo alternatives would be better for the country.
The trouble is that Germany has not been forced tochoose. It can continue to do no more than the minimum to preserve the euro.


Europe would be infinitely better off if Germany madea definitive choice between Eurobonds and a eurozone exit, regardless of theoutcome; indeed, Germany would be better off as well. The situation isdeteriorating, and, in the longer term, it is bound to become unsustainable. Adisorderly disintegration resulting in mutual recriminations and unsettled claims wouldleave Europe worse offthan it was when it embarked on the bold experiment of unification.