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[交流] Eurobonds without Fear

The day of the Eurobond may be near. What was once a quack’s idea for resolving Europe’s financial crisis is now the only reliable way to save the euro. Having their bonds purchased by the European Central Bank did not keep Greece, Ireland, and Portugal from needing a bailout. It will not save Spain and Italy, either.

But Spain and Italy are too large to be bailed out. The new European Financial Stability Facility (EFSF) is not up to the task. And enlarging the EFSF to an appropriate size would require massive additional French borrowing, which could well place France itself at the receiving end of a speculative attack.

This is where Eurobonds come in. The five countries in trouble will need to place tens of billions of euros in new debt and roll over even larger amounts of old debt. Markets long ago stopped buying bonds issued by Greece, Ireland, and Portugal, and might soon stop buying paper issued by Italy and Spain – or do so only at prohibitive interest rates. But markets would happily gorge on bonds backed by the full faith and credit of the eurozone.

Eurobonds would cut borrowing costs for the European Union’s two large troubled members. And it would spare German and other taxpayers from the EU’s solvent northern countries from having to fund yet another bailout of a southern member state.

The debate about whether and how to introduce Eurobonds has focused on the appropriate limits on issuance. With no limit, profligate countries could go on a spending spree at the expense of thriftier ones. After the advent of the euro, the eurozone’s Mediterranean members enjoyed a lending boom while piggybacking on Germany’s low interest rates. There is understandable reluctance to allow that to happen again.

But arguments about whether the limit should be 60% of GDP or more miss a larger point. Nineteen years of experience with the Maastricht Treaty, which created both the EU and the euro, has shown convincingly that such limits are unenforceable. Countries with the clout to flaunt the limits will do so whenever it is politically convenient. And, if a debt crisis is near, exceptions will be found, waivers will be issued, and buyers for the additional debt will be lined up.

So the question is not what to do when debt gets near its limit, however high or low. It is how to prevent debt from getting near that limit in the first place, except in very extreme and unusual circumstances. And for that, you need fiscal rules.

A fiscal rule is any pre-specified mechanism that constrains spending or the deficit. According to a study by the International Monetary Fund, 80 countries around the world use some kind of fiscal rule.

But not all fiscal rules are created equal. If too loose, a rule is merely ornamental. If too tight – a constitutional amendment requiring a balanced budget, for example – the rule could create rather than solve problems: think of the economic and political chaos that would ensue if Spain, with unemployment at 21%, were forced to eliminate its huge fiscal deficit overnight.

Sweden and Chile are almost poles apart geographically, but both have used sophisticated fiscal rules successfully. Chile sets a target for its cyclically-adjusted fiscal balance – that is, the balance that emerges after accounting for the deviations in commodity prices and domestic output from their trends.

When commodity prices boomed in the middle of the last decade, the rule called for huge budget surpluses – which Chile achieved, repaying almost all of its public debt and accumulating a sizable rainy-day fund. When the financial crisis came, Chile was able to mount an aggressive fiscal stimulus without so much as a hiccup from financial markets.

Of course, no fiscal rule can account for all contingencies. That is why you need an independent fiscal council to administer it, just as you need an independent central bank to pursue an inflation-targeting monetary rule. Agreeing on the composition of such a council for Europe would be hard, but no harder than it was to agree on the makeup of the ECB’s board.

Eurobonds plus fiscal rules: this formula is the euro’s best hope for salvation. Unfortunately, another crisis or two might be necessary before European leaders consider it seriously.

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