Crisis throughout Europe and ECB rate hike: Eurobonds could be the only solution to get out of the rubble. Let’s see what they are and how they work.
What are Eurobonds? Never before has it been as important for every citizen to be informed about what is happening at the political-economic-financial level in Europe and which solutions can be considered to save us from the crisis.
The monetary tightening of the ECB came in one of the worst periods of European politics, favoring a widening of the BTP-Bund spread. The debt/GDP ratio makes Italy and other countries more vulnerable to inflation than other European countries, bringing the “Eurobonds” to the fore. But what does it mean, what are we talking about?
Money.it, which has been in the field for years working in favor of proper financial training, explains in a simple way what Eurobonds are.
What are Eurobonds?
As reported by the European Parliament, Eurobonds are debt securities (securities issued by a debtor who needs money and which are purchased by investors, i.e. creditors) through which all member states of UE become debt managers jointly. In a nutshell, if a state fails to repay its debt - contracted through the issuance of Eurobonds - it would not be in trouble, because the other EU members are to pay.
Eurobonds are bonds issued to replace government bonds, with guarantees proportional to the shareholding in the capital of the Central Bank of Europe), by all eurozone countries.
How do Eurobonds work?
The objective of the Eurobonds is to collect liquidity (the money) and give it to the countries most in difficulty to strengthen the infrastructures and financial support measures for families, workers and businesses.
Eurobonds can be guaranteed by the European Investment Bank (EIB) or other credit institution as long as it is not the European Central Bank (ECB).
A term closely linked to Eurobonds is “mutualisation”: in fact, mutualisation of the debt is envisaged, ie the sharing of the relative debt burdens among several subjects.
The only Eurobonds issued so far, covered by guarantees proportional to the capital shares in the ECB, are those of the ESM in favor of Ireland, Portugal and Greece, during the sovereign debt crisis, between 2011 and 2015.
The advantages of Eurobonds
Eurobonds reduce the chances of a sovereign crisis but bring with them a moral hazard: governments with the most disastrous public finances (Italy in primis) could decide to increase their debt irresponsibly, taking on the risk (and the cost) of debt to the most virtuous countries.
The criticisms of Eurobonds
Apparently Eurobonds seem to be the solution to find a lot of money quickly, so as to support countries like Italy, Spain and France. However, the road to their emission is full of obstacles, most of them artfully placed by Germany and the countries of Northern Europe.
The main one lies in the total lack of harmony in fiscal and financial policy between the countries that make up the European Union: the public accounts of the various governments are very different from each other, such as laws and funding for welfare, not to mention the profound differences in the trend of economic differences, which is traditionally measured by the GDP.
To date, not even following the pandemic has an agreement been reached on the issue of new Eurobonds. All the proposals were rejected by Northern Europe, Sweden in the lead, as well as the French hypothesis of launching new emissions to face together the costs associated with expensive energy and the consequences of the conflict in Ukraine.
However, the more restrictive monetary policy could make new common debt issuances necessary in the Eurozone, where the economic crisis and the lack of growth have increased debts.
