By Fisher Investments
NEW YORK (
) -- Eurobonds. German Chancellor Angela Merkel hates them. French President François Hollande loves them. And a growing chorus of EU officials think they're the best bet for preserving the euro.
But are they, really?
The pro-eurobond case is simple enough: Instead of issuing their own sovereign debt, nations would issue bonds collectively and they'd share liability and debt service responsibility. Yields would no longer vary throughout the monetary union, theoretically smoothing one of the eurozone's most glaring imbalances. Peripheral nations' borrowing costs would likely fall, making it easier for them to borrow, service outstanding debt and stay solvent. So far, so good.
Easier borrowing also helps nations finance public infrastructure projects -- the main reason Hollande, Italian Prime Minister Mario Monti and their Brussels cohorts are so enamored of them. They believe fiscal stimulus will best help peripheral Europe's weaker nations start growing again, but financing these projects on a large scale is exceedingly difficult under the current system.
The European Commission typically pitches in, but nearly half of EU member states oppose increasing the Commission's budget. To nations like the UK, which are trying to rein in debt, sending more money to Brussels doesn't make sense. Eurobonds would theoretically provide a workaround to such political hang-ups.
To Merkel and her constituents, however, the advantages are overstated and the risks, particularly to Germany, glossed over. If Germany were forced to borrow through a collective scheme, where peripheral risks as well as German fiscal strength would determine yields, its borrowing costs would likely rise, and German taxpayers don't want to pay for (in their eyes) the profligacy of others. (A phenomenon Ken Fisher wrote about
And, as one German official told
pooling debt likely unleashes "unpleasant" political tensions over what is and isn't appropriate fiscal policy -- tensions that could dwarf today's bailout politicking.
Merkel also quibbles with eurobonds' larger purpose, infrastructure financing. Cross-border transport, water and communication projects can give economies a bit of a boost in the short term, but they don't do much to rectify nations' divergent competitiveness--the issue at the eurozone's heart. As Ken Fisher also
Europe's share of the global economy has fallen since similar troubles hit the region 20 years ago -- high unit labor costs, bloated public sectors and regulatory red tape have hampered productivity in some nations, making it difficult for them to compete within Europe and globally. Merkel has long championed free-market reforms to restore competitiveness will lay the best foundation for long-term growth, To her, eurobonds are a distraction and, at best, a Band-Aid.