Eurobonds: The Issue That Could Shatter Europe
Would you pool your debt with a bunch of debt addicts that have no intention of reducing their wild spending habits? Of course you wouldn’t. But that is exactly what Germany is being asked to do. Increasingly, “eurobonds” are being touted as the best long-term solution to the financial crisis in Europe. These eurobonds would represent jointly issued debt by all 17 members of the eurozone. This debt would also be guaranteed by all 17 members of the eurozone. This would allow all countries in the eurozone to enjoy the same credit rating that Germany does, and borrowing costs for nations such as Greece, Portugal, Italy and Spain would plummet. But borrowing costs for Germany would rise substantially. In fact, it is being estimated that Germany could be facing an extra 50 billion euros a year in interest expenses. So over ten years that would come to about 500 billion euros. Needless to say, Germany is not thrilled about this idea. But new French President Francois Hollande is pushing eurobonds very hard, and he has the support of the OECD, the IMF and many top Italian politicians. In the end, this could be the key to the future of the eurozone. If the Germans give in and decide that they are willing to deeply subsidize their profligate neighbors indefinitely, then the euro could potentially be saved. If not, then this issue could end up shattering Europe.
It is easy to try to portray the Germans as the “bad guys” in all this, but try to step into their shoes for a minute.
If you had some relatives that were spending wildly and that had already run up $100,000 in credit card debt, would you be a co-signer on their next credit card application?
Of course not.
The recent elections in France and Greece made it abundantly clear that the populations of those two countries are rejecting austerity.
Instead, they want a return to the debt-fueled prosperity that they have always enjoyed in the past.
Unfortunately, they need German help to be able to do that.