Eurobonds need some careful consideration

It seems like 1997 all over again. The big difference is that, this time, it's Eur-ope, along with the United States, but not Asia, that is teetering.

At a time when the entire financial world looks at developments in Europe with baited breath, it is pivotal that we Europeans resist the temptation to put the cart before the horse yet again — and jump headlong into new economic realities largely based on either wishful or overly optimistic thinking.

That, after all, is precisely what we did in the run-up to the euro, when all of official Europe put its collective hopes into the promising-sounding "Growth and Stability Pact". At the time, the switch to a common European currency was sold, in part, with the argument to put an end to American dominance of foreign exchange markets in general — and to the dollar's status as the reserve currency in particular.

This time, the case for launching eurobonds is made along similarly tantalising lines in the global power game. The creation of eurobonds is intended to have European debt capital markets compete head on with the US Treasury market. By making European markets equally deep and liquid, the hope is for lower interest rates on that debt.

Such grand designs aside, in a debt-infested world, all that ultimately matters is fiscal stability. That is why, in my view, before we get too excited and eurobonds, seen as some kind of panacea, we would do well to acknowledge that we have already failed in the mission of obtaining fiscal stability once. We cannot afford to do so again.

That certainly is the unequivocal view of the financial markets. There are two other, equally powerful reasons speaking in favour of consolidating our finances: first, fiscal stability is needed in order to have any hope of bring about sustainable economic growth, and it is needed, second, to stop burdening future generations with ever more debt.

Eurobonds can be a useful instrument over the longer term, as the end point of a process of fiscal consolidation, once the hard labour required in that regard has been done. In other words, their introduction should be a reward for past performance, not an illusory incentive for better fiscal behaviour in the future. The latter approach is precisely what we embraced at the launch of the euro, with known results (ie, near failure).

Recipe for euro demise

Europe's credit hinges on the fiscal performance of countries such as Germany, the Netherlands, Denmark, Finland and Poland. Making these countries, in effect, fiscally liable for the debt of other nations, as the premature introduction of eurobonds would do, is a recipe for the euro's demise.

Moreover, notions such as a "fiscal union" are not to be taken lightly. Even those who argue that it is in the logic of the European integration project to move in that direction — and who say that the process of the formation of the United States of America historically shows the way forward for Europe — forget one crucial thing. Most US states have a balanced budget requirement to meet each and every year. In addition, in the US there is no federal bailout clause for the debts incurred by individual states.

The writer is Director, IZA (Institute for the Study of Labour), Germany.