Sunday 27 November 2011

What are Eurobonds and why are they so important?

In the last couple of days, the term "Eurobond" is one that has been bounced around continuosly by the media. The news is that Germany opposes the issuing of Eurobonds, while France and (especially) Italy are favourable to them. But just what are they?
A eurobond is a debt obbligation which is issued by the Eurozone as a whole rather than from individual countries. Germany opposes the issuing of Eurobonds, despite the fact many economists say it is the most effective way to resolve the eurozone's financial troubles. The German finance minister, Woflgang Schauble, claims that eurobonds would not solve Europe's problems but rather divert attention from enacting real reforms in Europe's troubled economies.
In this, I agree with Schauble in that the problems affecting countries like Italy and Greece cannot be solved in the long run by joint bond sales. Structural problems led these countries to the brink, along with mismanagment and enormous levels of corruption. Eurobonds might well relieve market pressures for the moment, but it would allow also relieve pressures on these goverments to enact reforms and bring about long term change. At a time when Mario Monti's economic reforms are picking up consensus all over Europe as well as the markets (slowly) regaining some lost faith in Italy, it seems that Eurobonds might distract and ultimately lead Italy and other countries to commit the same mistake that brought them into the crisis in the first place: Value short term fixes rather than long term solutions.