Crushing unemployment among the young people in the EU

[DGuller]

[Admiral Yi]

Seems to me y'all need to get rid of the Clearing House mechanism, the one Joan talked about a while back.  Countries that are running current account deficits *should* see a decrease in money supply.

Not sure I understand Eurobonds.  All countries pool their national debts and then everyone jointly liable for it?  What does that do?

[Sheilbh]

Not sure I understand Eurobonds.  All countries pool their national debts and then everyone jointly liable for it?  What does that do?

The Juncker and German wise men proposal is that basically debt up to 60% of GDP is issued jointly and currently mutualised.  So everyone's jointly liable for that much (excluding EFSF nations - Greece, Portugal and Ireland).  Those bonds have senior status. 

Any subsequent debt they wish to incur countries can issue their own bonds for which they're solely liable and which are, inevitably, more risky because the debt's higher and they don't have senior status.  This would be happening as well as the austerity and debt reduction plans that are ongoing.

It would increase the borrowing costs for a country like Germany, I think the Commission estimated by about 1%, but would substantially reduce the rates for countries like Spain or even Italy.  And cutting the cost of borrowing is a huge help for those countries, they're not insolvent the Italians have primary surplus and I think a helpful support while they're going through the austerity process.  It's been argued that this would be cheaper and more of a long-term solution for the creditor nations than the current crisis-last minute summit-bailout cycle.  I think that's probably true.  The ESM looks a bit more long-term than the EFSF, but barely.

Edit:  Interestingly Monti recently said that he and Merkel clearly disagreed on Eurobonds, but once countries are cutting their deficits and the debt rules are imposed he hopes Europe, especially Germany, will look at the issue again 'more serenely'.

Germany, puppet master of Europe? I've missed that memo.

Enda Kenny was interviewed by a German paper.  He was asked if he spoke German and replied 'no, but my children are learning'

I think no one, not even them, know what their exact suggestions are. That's the problem with "stimulating demand". Demand is not something a heavily indebted government can just create out of thin air.

I think it is.  I think the real thing that we need to be able to do is stimulate demand in the short-term while showing clear medium-term commitment to deficit reduction.  I like Martin Wolf's suggestion, in the UK context, that we keep cutting ongoing programs (I'd add health as well, it shouldn't be ringfenced) and keep going with the deficit reduction but use the extraordinarily low interest rates to finance something like temporary payroll or VAT tax cut, or infrastructure spending.  Basically keep on cutting permanent government spending which will hopefully fix long-term problems but in a clearly time-limited way cut taxes or spend money on infrastructure.  He was aiming at the US debate with that and I can't see them going for it - I blame the Democrats.

The difficulty is even if you have that sort of policy, which I'd like, is how you could ever do it in a Eurozone context.  How can Germany stimulate demand in a way that helps Italy?  It's again the problem of too little integration happening prior to the Euro.

What's the ECB's role in Eurobonds? I thought the idea was mutualizing government debt.

I think you'd need a Eurozone wide institution to issue them and to control them (ie. tell governments  when they've reached the Eurobond limit) and probably to regulate them as collateral, but I'm not sure on that.  I think the ECB would probably be better placed to do that than any other EU bodies.

Maybe it was just not reported in the media I read, but I have not heard anybody from Spain or wherever publicly suggesting that we should change the EU treaty that explicitely forbids the ECB buying bonds. Without such a treaty change, the ECB bankers would overstep their mandate.

The Greek bailout was legally justified by treaty provision for helping countries suffering from natural disasters, because bailouts aren't legal in the EU treaties.  I'm fairly sure I've read some legal workarounds for that treaty provision.  I mean they ECB are effectively buying bonds now.  Via the banks which is probably against the spirit of the treaty.  They're just not doing enough.

That's a possiblity. But if an open-ended, unlimited fiscal transfer or imperial administrators being sent from Brussels to right Greece's economy or the central bank losing its independence and mandate not to finance governments is what it takes to keep it together, I am not sure if that price isn't too high.

I take your point and sort of agree.  I think my view is that this is to some extent an existential crisis for the Euro and all countries need to decide quite how much the Euro is worth - which is perhaps different from how much can voters take.  It may be that the price is too high.

Seems to me y'all need to get rid of the Clearing House mechanism, the one Joan talked about a while back.  Countries that are running current account deficits *should* see a decrease in money supply.

How does this work though?

Edit: My uni has prize essays in each of the subjects.  The EU law question: 'Does a Member State within the eurozone lose the right to be a Member State of the EU if it gives up the euro?' 

[Admiral Yi]

Interesting notion Shelf, and not as ridiculous as I had imagined when I first heard of Eurobonds.  I see two problems however.

First, a country can still default on its senior debt, leaving the other member states on the hook.

Second, investors would realize that any potential haircut would fall on a smaller base, meaning risk premiums would rise even higher on the junior debt.

[Iormlund]

Yes but it would take some time to issue over 60% of GDP in debt, so that might grant some breathing room to Italy. Spain, having much less debt, would in theory be in an even better position.

That been said, it would take more than Eurobonds to kickstart Spain into growth again. On that front, the government has just announced that banks will need to provision another 50 billion € before the end of the year. That means even less credit.

[Admiral Yi]

Yes but it would take some time to issue over 60% of GDP in debt, so that might grant some breathing room to Italy. Spain, having much less debt, would in theory be in an even better position.

That been said, it would take more than Eurobonds to kickstart Spain into growth again. On that front, the government has just announced that banks will need to provision another 50 billion € before the end of the year. That means even less credit.

Are we talking about additional debt equalling 60% of GDP on top of existing debt??  That can't be right.  Surely it means of existing debt, that portion up to 60% of GDP gets the Euroguarantee.

[Sheilbh]

First, a country can still default on its senior debt, leaving the other member states on the hook.

That's true.  There'd still presumably be the ESM which will be €500 billion which is still too small, though that may not help.

But we're talking after repeated bailouts of member states.  I'm not seeing a solution that allows member states in general to get off the hook if there's a default.

And as I say the goal of Eurobonds is to lower borrowing costs for the solvent countries facing debt challenges - Belgium, Italy, Spain - not the potentially insolvent (PIG).  It would only happen in the context of current and future austerity and the required constitutionalisation of debt limits.  So those conditions address the immediate issue of debt in the medium term while Eurobonds provide a solution to borrowing costs in the short term, after which, debt will have been reduced significantly anyway.

Second, investors would realize that any potential haircut would fall on a smaller base, meaning risk premiums would rise even higher on the junior debt.

This is already a huge issue at the moment.  None of the treaties or solutions proposed so far really settle the issue of the seniority of ECB held bonds.  From what I understand in Greece the ECB is claiming a position like that of the IMF but that's not legally clear and politicians generally don't support it.  This hasn't been addressed yet by any of the Eurosummits or treaties, that could be another reason the ECB prefers to buy up government debt indirectly by easy loans to Eurozone banks.

Also the ESM has been given senior debt status equal to the IMF I think.  I'm not sure what the status is of the EFSF.

There is a real danger that Europe's dangerously overcomplicating this.

[The Brain]

1. Wrong thread.

2. Too expensive.

3. Too big.

[Sheilbh]

Are we talking about additional debt equalling 60% of GDP on top of existing debt??  That can't be right.  Surely it means of existing debt, that portion up to 60% of GDP gets the Euroguarantee.

No.  It's 60% of GDP total.  I think Spain's only at 60% now so if they could somehow mutualise that to take advantage of lower borrowing costs it would have a huge impact.

But existing or future debt.  So if Estonia (national debt of about 20%) was to have a crisis, new treaty and the required constitutional changes permitting, they'd have a lot of room before they had to start facing the market alone.

[Admiral Yi]

But we're talking after repeated bailouts of member states.  I'm not seeing a solution that allows member states in general to get off the hook if there's a default.

There's a difference between being on the hook for however much has been lent out to the PIIGS already and all debt of all member states up to 60% of GDP.

And as I say the goal of Eurobonds is to lower borrowing costs for the solvent countries facing debt challenges - Belgium, Italy, Spain - not the potentially insolvent (PIG).

This was my second objection.  It's possible it won't lower borrowing costs for troubled members because default risk would be heightened on the junior debt.

[Iormlund]

Yes but it would take some time to issue over 60% of GDP in debt, so that might grant some breathing room to Italy. Spain, having much less debt, would in theory be in an even better position.

That been said, it would take more than Eurobonds to kickstart Spain into growth again. On that front, the government has just announced that banks will need to provision another 50 billion € before the end of the year. That means even less credit.

Are we talking about additional debt equalling 60% of GDP on top of existing debt??  That can't be right.  Surely it means of existing debt, that portion up to 60% of GDP gets the Euroguarantee.

It doesn't make sense to classify current debt as Eurobond-debt. You won't get any benefit from joint liability that way. The most logical way is for governments to issue new bonds as they do now, mostly when previous debt matures. Until they reached 60% of GDP those would benefit from lower interest rates. Once all previous debt matured you'd have only low-interest Eurobond and high-interest crappy bonds. Hopefully long-term solutions would be in place by then and outlook positive enough to affect yields.

[Admiral Yi]

I see what you're saying.  Although a lot of debt carries shorter maturities so it might not take that long to re-classify debt equalling 60% of GDP.

[Sheilbh]

There's a difference between being on the hook for however much has been lent out to the PIIGS already and all debt of all member states up to 60% of GDP.

Well all that they're on the hook for now and in the future for the PIIGS. 

But as I say given the treaty and required constitutional amendments it should become almost impossible for a country to go bankrupt.  But again that's part of the more long-term solution that's being designed.

[Iormlund]

It would depend a lot on the country, yes. IIRC Spain has to issue about half a trillion € worth in 2012. That would mean a respite of a bit over a year, which would be helpful.

[Sheilbh]

I see what you're saying.  Although a lot of debt carries shorter maturities so it might not take that long to re-classify debt equalling 60% of GDP.

Yeah.  I think it could be done relatively quickly through necessary refinancing over the next few years.  I think Italy's got a huge amount coming in 2012.