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16 August 2011

FT: Europe need not wait for Germany


In this FT Opinion, Martin Sandbu writes that the lesson to draw from Washington's debt ceiling debate and the downgrade of its sovereign credit rating by Standard & Poor's - neither of which drove up US bond yields - is that size matters.

It is also the lesson to draw from Japan, which combines the world’s lowest bond yields with one of its largest public debt stocks. This lesson has a plain implication for eurozone countries: they should pool their debts – with or without Germany’s participation. The benefits from creating a debt market of a size to rival those of the US and Japan would clearly outweigh the costs.

At the end of 2010, Italy had €1,500 billion of bonds outstanding; Germany, €1,400b billion; France, €1,300 billion. (UK debt securities amounted to £960 billion, or €1,100 billion.) These are still sizeable markets. But investors can abandon them much more easily than they can US or Japanese bonds. Put differently, a given size of investor outflow from a European country’s bonds will be far more disruptive than from bigger markets.

Replacing all national sovereign bonds (although not loans) with common eurobonds would create a market worth €5,500 billion. It would be backed by governments that together owe less debt, run a lower combined deficit and have greater tax-raising capacity than the US and Japan. It would almost certainly lead to lower yields than the current eurozone average and virtually eliminate the possibility of a bond buyers’ strike.

The true answer is that Europe is waiting for Germany, whose public is allergic to anything like a “transfer union” and whose leaders think the state would pay higher yields on eurobonds than Bunds. The solution is to leave Berlin behind. Take the eurozone without Germany and its most like-minded partners – the Netherlands, Austria, Finland and Slovakia. Also exclude Greece, which in any case needs special treatment. The remaining 11 countries can create a €3,500 billion bond market with macro-economic figures only marginally worse than those for the eurozone as a whole.

Full article (FT subscription required)



© Financial Times


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