The only long-term solution for us is closer Eurozone integration

hmmm

Ever since the introduction of the Euro, the Irish government (and people) have been able to borrow at close to German rates, because the market assumed that Euro membership would force closer synchronisation of economies, and a pooling of risk.

The problem now for countries like ourselves is we will never be able to get back to borrowing at those rates because the market has realised that we should never have been rated at German risk levels in the first place. Bailout mark 1 cannot succeed as we will never be able to go back to the market and borrow at previous rates. Even if all our debt magically was disappeared, the markets would still not lend to us at German rates.

The implications of this for the ordinary person are future mortgage rates returning to the norm when Ireland was outside the Eurozone, perhaps starting at 10% and higher, which will be unacceptable to a population which now thinks paying a rate of 5% on their consumer loans is extraordinary and unbearable.

Default isn't a solution, we write off some current debt (if we're lucky), but we'll still be stuck with paying large premiums over German debt in the future. It might seem like a quick fix solution, but it will cost us a fortune in the long term.

The only solution which will allow Ireland to get back to borrowing at reduced rates is some form of European bond. That's already been floated, a bond which is issued by all Eurozone members and which is guaranteed by all members. The alternative is a transfer union which will be politically unacceptable to the Germans, Finns, Dutch etc (and rightly so). A Eurobond, conditional on tight collective fiscal monitoring and control is the only answer to the problem. No more can we have countries breaking the Euro, the rules in a Eurobond environment have to be strict and enforceable.

I can see a referendum in our future. Agree to a Eurobond and the handover of large scale fiscal authority, or try a future outside the Eurozone. The "pro" argument here can be neatly reduced to an unsophisticated but powerful message of "choose 5% or 15% mortgages for your kids".

Peanut

Absolutely agree. This is the only realistic option to try to resolve the situation.

What will be interesting is how the general public and No to Lisbon campaigners will react to any referendum on increased fiscal union. I get the feeling that we are already moving swiftly towards that destination, even though right now, it's being framed in the sense of a short-term austerity plan.

What seems likely to happen is that this short-term plan will morph bit by bit into a long-term transfer of power. I don't have any particular problem with that, since it could be seen, in effect, as a more robust enforcement of stability rules that we had already signed up to. However I can understand how many people might feel concerned about this.

Sand

Why would Germans agree to pay higher interest rates to support peripheral states who want to borrow at German rates without actually running German policy?

Eurobonds might lower the rates at which peripherals can borrow, but by extension Germany will have to pay higher rates given it will be underwriting the risk of those feckless peripherals.

Germany might be persuaded to settle accounts as a one off cash out - but chaining itself to the fiscal policy of a feckless periphery ( or being resented for dictating fiscal policy to a feckless periphery) would be about as popular as chaining themselves to lepers. The Euro was offered on the grounds that Germany would never have to do so, and its already deeply unpopular.

_Kaiser_

Can't see it happening to be honest.

No matter how practical and/or "right" this move might be (and I'm not convinced getting closer to Europe is a good thing anyway), the fact is that the "average Joe" sees the EU and the IMF (and FF of course!) as responsible for all our woes of the last 3 years.

We all know what happened to FF/the Greens the last time the public had their say - if a referendum is held it'll be the same outcome for Europe

Of course this IS Ireland of course where Democracy = Do it again till you give us the answer we want children, so who knows....

hmmm

Sand wrote: »

Eurobonds might lower the rates at which peripherals can borrow, but by extension Germany will have to pay higher rates given it will be underwriting the risk of those feckless peripherals.

Absolutely agree, but I don't think Germany has much option. They can either let the Euro collapse, which I think will prove unacceptable, or they can implement some form of a transfer union which proves politically acceptable to the German people. A "Eurobond" sounds incomprehensible to most ordinary citizens, and the EU Sir Humphreys are past masters at introducing incomprehensible solutions with far reaching implications. Most people won't realise that German interest rates rise as a consequence, particularly as the Germans head towards a balanced budget.

The second advantage is the strict fiscal rules that would be required.

Crazy Horse 6

The game is up. I'd say the Germans already have a plan in place after the fall of the euro

Godge

Agree with the OP.

The price of FF's fecklessness is the loss of our sovereignty, in the short term to the IMF/EU bailout; and in the long-term to fiscal consolidation and a different straitjacket for our policies. We can put up a sign at Dublin Airport - Welcome to the North Dakota of Europe.

For what died the sons of Roisin - was it greed?

matthew8

I would sooner die than see the day when that scumbag Sarkozy can do whatever he wants with our taxes.

Sticky_Fingers

hmmm, I have major problems with your argument:

Ever since the introduction of the Euro, the Irish government (and people) have been able to borrow at close to German rates, because the market assumed that Euro membership would force closer synchronisation of economies, and a pooling of risk.

A far as I remember we were able to borrow at low rates due to a unprecedented boom that this country experienced during the late 90's early 00's right when the Euro went on stream. Shortly after the real boom ran out of steam only to be replaced with the faux one fueled by the low interest rates as a result of our Euro membership.

Therefore the low interest rates created in part by our membership of the Euro is a critical cause of the crash we now face. Had we not entered the Euro and had been able to set our own realistic intra bank interest rates we may have been able to put the brakes on sooner then we did (or be forced to by the markets sensing a slowdown). It is unlikely that there would have been any housing bubble if not for the Euro and if there had it most certainly would not have taken on the catastrophic proportions it finally did.

The problem now for countries like ourselves is we will never be able to get back to borrowing at those rates because the market has realised that we should never have been rated at German risk levels in the first place. Bailout mark 1 cannot succeed as we will never be able to go back to the market and borrow at previous rates. Even if all our debt magically was disappeared, the markets would still not lend to us at German rates.

Good, hallelujah and praise Jesus that we will never be able to return to the bad old days of low interest repayments. This is a good thing because if the last decade has taught us anything it is that we as a nation have a problem with self control. We are not a major economic power that deserves cheap interest rates, we never were and never will be.

The implications of this for the ordinary person are future mortgage rates returning to the norm when Ireland was outside the Eurozone, perhaps starting at 10% and higher, which will be unacceptable to a population which now thinks paying a rate of 5% on their consumer loans is extraordinary and unbearable.

As opposed to the extraordinary and unbearable situation we now reside in where a property bubble was propagated by low interest rates and shoddy lending practices. I never want to see another housing bubble again in this country, if that means that I will have to suffer a 10-15% mortgage to ensure that I am not paying over the odds for a house whose price has been distorted by a massive credit surplus then so be it.

Default isn't a solution, we write off some current debt (if we're lucky), but we'll still be stuck with paying large premiums over German debt in the future. It might seem like a quick fix solution, but it will cost us a fortune in the long term.

Neither is further integration where we become a small and probably neglected cog in a much bigger machine designed for the benefit of our neighbours. Again I call upon history and say that the low interest rates of the past were designed solely for the benefit of the sluggish Franco-German economies not for ours. I don't want a Eurobond because it's rates will have little our no bearing on what this country needs only on what suits Paris or Berlin.

Morally I believe that if this country needs to borrow then it should be at a high rate of interest, I don't want the government to have the easy option of borrowing money to solve problems that can be tackled more effectively by addressing the root cause and implementing proper efficiencies into the system. The path of cheap credit leads to disaster IMO and we should not borrow unless we really really have to, as a nation we need to live within our means, cheap credit undermines that since politicians will always take the easy option if it is available.

The only solution which will allow Ireland to get back to borrowing at reduced rates is some form of European bond. That's already been floated, a bond which is issued by all Eurozone members and which is guaranteed by all members. The alternative is a transfer union which will be politically unacceptable to the Germans, Finns, Dutch etc (and rightly so).

So we are going to trade a short term reprieve for long term neglect? Do you really believe that we will actually be looked after in such an arrangement whereby we hand over our sovereignty to the EU for the 30 pieces of silver to pay back those very same people. That is completely unacceptable to me and I would say that there are many ordinary people around the country and throughout Europe who would agree with me.

A Eurobond, conditional on tight collective fiscal monitoring and control is the only answer to the problem. No more can we have countries breaking the Euro, the rules in a Eurobond environment have to be strict and enforceable.

What kind of control are we talking about here, Corporation Tax I assume is a given as is income tax and perhaps VAT. Would we be told what could spend our money on, say what roads we can build and what salary we can pay our civil servants? It could work if that was the case but then again we run into the problem were we would be nothing more then a vassal state to the larger economies without any freedom to set our own course.

What would we get for this agreement, cheap money that we would not be allowed to spend unless we got the OK from our friends in Brussels. This would solve the credit glut for sure and reduce the chance of the government throwing money at every problem like they did in the past but are we really getting a good deal, the loss forever of our own independence for some low interest pocket money (which we have to pay back of course) from our neighbours.

I can see a referendum in our future. Agree to a Eurobond and the handover of large scale fiscal authority, or try a future outside the Eurozone. The "pro" argument here can be neatly reduced to an unsophisticated but powerful message of "choose 5% or 15% mortgages for your kids".

I would say "choose 5% or 15% mortgages for your kids" is firmly in the con side of the argument, we should learn from our mistakes so our kids don't have a chance to make them all over again. Also on the con side would be the agreeing to such a deal would basically just be a firesale of our sovereignty and future ability to compete against other countries within the Eurozone. The kids may get low interest rate mortgages out of it but that's only if they have jobs to go to. How many MNCs would stick around once we are forced to increase our CT rate as a condition of membership of the Eurobond?

I'd rather take the 15% loan rate and have a chance of remaining competitive then live in a economic backwater that is completely dominated by the larger members. We need to (once again) become a adaptive and flexible economy to survive in this world and hobbling ourselves for the sake of quick easy cash is doing a disservice to the future generations of this country.


Just my 2 cents...

Cavehill Red

No thanks. I'd rather pass on the Napoleonic/Hitlerian fantasy of a 'united' Europe.

Surely recent years have demonstrated that such an entity would be run for the sole benefit of certain large central-West states, and to the detriment of countries like ours, small and on the periphery.

Monetary policy set in Frankfurt enflamed our economy with cheap debt when we needed it quenched and managed. Now monetary policy from the same place smothers our chance of recovery when we need that. Oh, and why do we need it so badly? Because their banks want repaid by our banks is why.

To be perfectly honest, and while it galls me somewhat to say so, I think a much better option for securing a future for this nation which is both vibrant and somewhat in our hands would be to withdraw from the euro and reintroduce the punt, then link it to the sterling zone after the necessary devaluation (default.)

ei.sdraob

No we do not need further integration, what we do need is:

* Actually follow existing agreements such as the Growth and Stability pact, and yes the likes of Germany and France were the first ones to ignore it and got no slap on wrists for it :rolleyes:

* What exactly requires new integration? that cant be done under Lisbon?? As far as I know the EFSF was setup to avoid Lisbon for purely political reasons.

* As I mentioned many times before the EU needs a US style FDIC deposit insurance scheme and bank wind down scheme, and no the existing work towards one is waaay to slow and existing scheme (sticky at top of forum) is a joke which will not be able to deal with even a small run for at least a decade.

* The ECB and each countries CB need to work more closely, in US the FED has 3 main aims, in EU the ECB only has the inflation target the rest is done (or not done in case of Ireland) by regional CBs, once again no slap on the wrists for not doing their job


To summarize, we dont need more ****, we need to follow existing **** for a starter

---

further thoughts:

* I dont see how more deluded and incompetent beuracrats can help

* The memory is still fresh with a certain Lorenzo of ECB fame talking about Irish people as "subjects", these people in the ECB already think that democracy is a dirty concept

rumour

ei.sdraob wrote: »

To summarize, we dont need more ****, we need to follow existing **** for a starter

---

further thoughts:

* I dont see how more deluded and incompetent beuracrats can help

* The memory is still fresh with a certain Lorenzo of ECB fame talking about Irish people as "subjects", these people in the ECB already think that democracy is a dirty concept

Couldn't agree more, especially your last point. This was and is my objection to any further integration of Europe currently. It is not being set up as a collection of nations but rather servants to the empires of France and Germany. The voting construct of Lisbon ensured this. Any attempt to even debate this was shouted down with claims of xenaphobia and/or branding by association to some of the more extreme nutty elements.
The incapacity to intellectually debate Lisbon on where irt is leading or what the implications of the treaty were was dumbfounding during both recent votes.

Seems to me we are more interested in the entertainment provided by ability or not of our politicians to spoof and hence we make our decisions accordingly.

Debtocracy

If we remain within the Euro we will be become financial slaves to the banking sector and political slaves to Northern Europe. No new financial instrument will change this. We need to get out of the Euro before the politics gets too extreme and before people become too poor to buffer against the shock of changing currencies.

If you’re looking for ideas, check out Iceland:
http://www.bloomberg.com/news/2011-07-06/debt-raters-miss-iceland-rebound.html

hmmm

It's infuriating that any thread that touches on Europe is hijacked by the "new Napoleon/Fourth Reich" crowd. (not you SF).

Sticky_Fingers wrote: »

It is unlikely that there would have been any housing bubble if not for the Euro and if there had it most certainly would not have taken on the catastrophic proportions it finally did.

How can you say that when we had policy options available to us to curb the bubble which we didn't implement? Remember all the talk about soft landings, and central bank reports telling us how Irish property prices were going to rise forever? The Euro may have magnified the bubble, but I don't buy any argument that we would have done anything differently if we controlled our own currency.

I never want to see another housing bubble again in this country, if that means that I will have to suffer a 10-15% mortgage to ensure that I am not paying over the odds for a house whose price has been distorted by a massive credit surplus then so be it.

I wouldn't disagree with you, but the electorate will. No politician is going to tell people that they are going back to 10-15% mortgage rates.

I don't want a Eurobond because it's rates will have little our no bearing on what this country needs only on what suits Paris or Berlin.

We won't have to use Eurobonds, we can borrow ourselves (at higher rates) if we wish. Again, the control is entirely in our hands.

What kind of control are we talking about here, Corporation Tax I assume is a given as is income tax and perhaps VAT. Would we be told what could spend our money on, say what roads we can build and what salary we can pay our civil servants?

It would be the same as the IMF/ECB deal, a fiscal straitjacket within which we could decide the detail. We will be told that our deficit can not be larger than x%, but if we choose to spend our tax money on huge pensions for ex Taoiseach rather than A&E wards, that's our choice. I'd love to see something like this in place, our own politicians and electorate have proven to be incompetent at running our own financial affairs.

beagle001

Nothing wrong with linked currencies if there is concrete integration within the union but this is not the case for the Euro.
I am not against the Euro but it has been a disaster and I see no real outcome but that it will implode massively.
The Germans have had enough and are not comfortable handing over the German credit card to countries like Greece,Portugal and Ireland.
A majority anxous sentiment within the German people right now and they do not want to destroy their own country for the sake of the Euro,I think a default is on the cards but how or what will hapen is very hard to predict.

hmmm

beagle001 wrote: »

The Germans have had enough and are not comfortable handing over the German credit card to countries like Greece,Portugal and Ireland.

Germany has been one of the major beneficiaries of the Euro and will defend it to the end, I think you've been listening to too many of the apocalyptic posters on here. What they don't want to do is have to bail out the feckless like ourselves, but unlike Ireland they will find the political maturity to do what is necessary.

beagle001

[FONT=Verdana, Arial, Helvetica, sans-serif]The reason I’m sceptical about it boils down to hard facts. Currency unions fail unless they are backed by political and economic union. Europe currently isn’t. So just how close to full political union can Europe become before the voters decide they will go no further?[/FONT]
[FONT=Verdana, Arial, Helvetica, sans-serif]The alternative endgame of course, is a ‘disorderly default’ by one or more of the countries in trouble. It’s not possible to sketch out a step-by-step guide as to how this would happen. But for example, let’s say political collapse leads to one of the indebted countries turning around and telling its creditors they can sing for their money. The market panics first, then asks questions later. Borrowing costs shoot up across the eurozone, the weaker banks are driven to the wall, everyone’s looking for a bail-out again, but there’s no money left to fund it.

That’s what people mean when they’re comparing Greece to Lehman Brothers. It doesn’t have to happen that way. A solution exists, as long as everyone is prepared to accept the implications: much closer integration, and open fiscal transfers from taxpayers in one country to another such transfers already happen of course. They’re just described as grants.[/FONT][FONT=Verdana, Arial, Helvetica, sans-serif]That’s why I think we’ll have to see a much scarier blow-up before this crisis is over. [/FONT]
[FONT=Verdana, Arial, Helvetica, sans-serif]
[/FONT]

hmmm

beagle001 wrote: »

That’s why I think we’ll have to see a much scarier blow-up before this crisis is over.

I think the "final" blow-up which will force the large-scale solution is happening as we speak, the policy of kicking the can down the road has run its course now that Spanish & Italian bond spreads are accelerating. That's why we have so many emergency meetings being held, the Finance Ministers know that they haven't been able to pull off a quickfix solution, so they will move on to the bigger and more robust solutions.

beagle001

[FONT=Verdana, Arial, Helvetica, sans-serif]What’s making things worse is the fact that the eurozone’s leaders are still going round in circles over what to do about Greece. As a result, the market has thrown its hands up in disgust and moved on to the next group of vulnerable countries.
G[/FONT][FONT=Verdana, Arial, Helvetica, sans-serif]reece,Ireland and Portugal are locked out of the markets.
The rough line in the sand so far – the point of no return – is 7%. Spain’s ten-year borrowing costs rose above 6% yesterday, while Italy’s hit 5.7% and are still rising.[/FONT][FONT=Verdana, Arial, Helvetica, sans-serif]It is worth remembering that in the days before these countries were backed by the full faith and credit of Germany [/FONT][FONT=Verdana, Arial, Helvetica, sans-serif]their cost of borrowing was usually a lot higher.
[/FONT][FONT=Verdana, Arial, Helvetica, sans-serif]So forget talk of “bunga-bunga” parties. A crisis in the Italian financial system is a big deal.[/FONT]
[FONT=Verdana, Arial, Helvetica, sans-serif]Italy is the third-largest economy in tha[/FONT][FONT=Verdana, Arial, Helvetica, sans-serif]t it also has Europe’s second-highest debt-to-GDP ratio behind Greece, standing at 119% in 2010. And that’s the problem. Prime minister Silvio (playboy) Berlusconi is meant to be pushing through a €40bn austerity plan to cut the country’s spending.
[/FONT][FONT=Verdana, Arial, Helvetica, sans-serif]It’s also the third-largest bond market in the world, behind the US and japan.
[/FONT][FONT=Verdana, Arial, Helvetica, sans-serif]But voters are fed up. Times are already tough in Italy. So the last thing many in the government want is to anger them even more by making cuts. And the market has been unnerved by news that Berlusconi seems to have fallen out with his finance minister[/FONT].
[FONT=Verdana, Arial, Helvetica, sans-serif]It’s fair to say that Europe’s leaders aren’t really impressing anyone with their crisis management skills and no amount of meetings can fix this as we stand.
[/FONT]
[FONT=Verdana, Arial, Helvetica, sans-serif]

[/FONT]

ei.sdraob

hmmm wrote: »

Germany has been one of the major beneficiaries of the Euro and will defend it to the end, I think you've been listening to too many of the apocalyptic posters on here. What they don't want to do is have to bail out the feckless like ourselves, but unlike Ireland they will find the political maturity to do what is necessary.

The bailouts are being challenged in the German courts now, all the best wishes for the survival of the euro from Germany would amount to nothing if their courts rule that the law was breached. All due to article 125

The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State.

With Germany not being able to budge, that leaves the ECB to act and so far they are not to bothered about the whole house of cards falling apart.

lucernarian

hmmm wrote: »

Germany has been one of the major beneficiaries of the Euro and will defend it to the end, I think you've been listening to too many of the apocalyptic posters on here. What they don't want to do is have to bail out the feckless like ourselves, but unlike Ireland they will find the political maturity to do what is necessary.

I'm not so sure this represents the future political maturity you speak of:
http://www.telegraph.co.uk/finance/financialcrisis/8631219/German-Nein-leaves-Italy-and-Spain-in-turmoil.html

Peanut

I wouldn't automatically assume either that any further integration or enforcement of stability pacts would mean losing control of corporation tax, for example.

These would simply be stricter rules for being a Eurozone participant (or as ei.sdraob suggests, actually sticking to what was there already). We could still go back to using punts etc. at a later date.

thebman

Sand wrote: »

Why would Germans agree to pay higher interest rates to support peripheral states who want to borrow at German rates without actually running German policy?

Well in reality, even if we did run German policy, we would be a greater risk as we don't have a domestic manufacturing base and depend on FDI which is highly mobile.

later12

Sand wrote: »

Why would Germans agree to pay higher interest rates to support peripheral states who want to borrow at German rates without actually running German policy?

Eurobonds might lower the rates at which peripherals can borrow, but by extension Germany will have to pay higher rates given it will be underwriting the risk of those feckless peripherals.

Germany might be persuaded to settle accounts as a one off cash out - but chaining itself to the fiscal policy of a feckless periphery ( or being resented for dictating fiscal policy to a feckless periphery) would be about as popular as chaining themselves to lepers. The Euro was offered on the grounds that Germany would never have to do so, and its already deeply unpopular.

This was first dealt with in a paper by De Grauwe and Moesen and is now treated in almost every academic economics discussion of European sovereign bond issues.

The EIB is the proposed European Investment Bank

http://www.econ.kuleuven.be/ew/academic/intecon/degrauwe/pdg-papers/work_in_progress_presentations/proposal%20eurobond%20issue.pdf

Whatever one may think of the motives of Germany, the German resistance to a joint euro bond issue is a fact of life. The question then is whether this opposition can be reduced by going some way towards relieving the German fears that it will have to foot the bills. Here is our proposal.
The euro bond issue would have the following characteristics. First, each euro government would participate in the issue on the basis of its equity shares in the EIB. Second, the interest rate (coupon) on the euro bond would be a weighed average of the yields observed in each government bond market at the moment of the issue. The weights would also be given by the equity shares in the EIB. Third, the proceeds of the bond issue would be channeled to each government using the same weights. Fourth, each government would pay the yearly interest rate on its part of the bond, using the same national interest rates used to compute the average interest rate on the euro bond. Thus, using the February 2009 data, Greece (we use Greece here as the prototype high risk country) would have to pay a yearly interest on its part of the outstanding bond of 5.7% while Germany would have to pay only 3.1%.
What are the advantages for the different countries? Let us concentrate on Germany first. Much of the fear that a common euro bond issue would lead to a free riding problem forcing Germany to foot the bill disappears in this scheme.

ei.sdraob

Are Euro bonds the solution?

Look at it this way


We had rotten banks being guaranteed by the state (as many now argue with hindsight that was dumb idea), now the state is junk.

Will guaranteeing junk states by the whole of europe really solve the problem or will it endup bringing down the EU? Especially as the list of junk states continues to grow...

Mayo Exile

Irish Times editorial from yesterday calling for greater fiscal union as the only way to solve the crisis now.

I'd also say that blaming the euro and the era of low interest rates for alot of our troubles is unfair. Obviously low rates allow "cheap" money, but remember every house purchase here was a voluntary decision by those concerned.

Also removing some level of fiscal responsibility from many of the cretins that reside or have resided in Leinster House (if some sort of Euro fiscal union happens) might be a good thing in itself until they are actually shown to be capable of governing the country properly. It might stop them using the economy to "buy" elections like 2002 and 2007.

Move now to deal with debt crisis.

THE TECTONIC plates of international finance began to shift four years ago this summer. The world has since been living with repeated tremors, the consequences of the earthquake of Lehman Brothers’ collapse in 2008 and near-constant fear of further, possibly even more damaging upheaval. Poorly designed structures built atop fault lines of finance have been affected most severely. None is bigger or more at risk than the euro.

Conceived as the crowning of a half-century of European integration, the continent’s currency union was hugely ambitious, not least in its bringing together of such a diverse group of economies. It was also a risky enterprise: monetary union without fiscal/political union is subject to the kind of strains currently being experienced between centre and periphery. Before the euro’s launch economists warned that history was littered with examples of failed currency unions in which economic fundamentals went unheeded. But the political push for European integration trumped the dismal constraints of economics. Europe took the plunge.

As Europe’s debt crisis deepens, with tremors running through the Italian and Iberian peninsulas, unscrambling the egg of currency union is not an option. The notes and coins in pockets, from Helsinki to Palermo, Bratislava to Tralee, can’t be replaced overnight with legacy currencies. In current circumstances, even the hint of introducing a new currency would invite capital flight on a scale that would bleed any economy dry. Massive default would ensue. The banking system at the core of the zone would pay the price. Such a scenario would benefit nobody and be to the detriment of all.

If going back is not an option, standing still and hoping the crisis will abate of its own accord is fast ceasing to be a realistic alternative. The collective European response has been, almost without exception, too little too late. Given the extent of the crisis, the response now can be nothing less than overwhelming. With Italy and Spain infected by the contagion that Ireland, Greece and Portugal were unable to recover from, completing the euro project by creating a fiscal union appears to be the only real alternative to preventing it joining failed monetary unions in the dustbin of history.

The issuing of eurobonds has consequence far beyond finance and economics. For euro zone states to fund themselves with eurobonds would be a step towards full political union. But this has always been the project’s ultimate end-point. And for good reason. Europe’s extraordinary and unprecedented experiment in political and economic co-operation has proved, mostly and overwhelmingly, to be a success. Europe must overcome its debt crisis or put all that at risk.

And, lest anyone forget at this moment of crisis, the net benefits for Ireland of European engagement have been great. Indeed, in many respects, no other state has had as much benefit with as little cost. Being fully involved in our continent’s structures of co-operation remains a vital strategic interest. As long as integration is Europe’s destiny, it is Ireland’s destiny too.

Link: http://www.irishtimes.com/newspaper/opinion/2011/0716/1224300819433.html

Sand

@Later10

This was first dealt with in a paper by De Grauwe and Moesen and is now treated in almost every academic economics discussion of European sovereign bond issues.

The EIB is the proposed European Investment Bank

Intriguing idea but theres a few logic gaps that Im struggling to cross.

Second, the interest rate (coupon) on the euro bond would be a weighed average of the yields observed in each government bond market at the moment of the issue.

My imperfect understanding would be the interest rate on any bond is determined more by what the issuer can get the bond issue fully subscribed at rather than as the result of a maths formula. The maths might say X, the market might say Y. What happens then? Assuming the bond issue was to sustain a need then the interest rate is going to be whatever the market sets to meet that need.

Secondly, its unclear, but this interest rate=weight average maths solution seems to imply a continuing or existing national government bond market running alongside the the Eurobond issues. Wont the existence of this Eurobond have a distorting effect as speculators seek to find differentials between the national and supernational bonds? This follows on to my next point:

Third, the proceeds of the bond issue would be channeled to each government using the same weights.

So if we presume Irelands weight is in line with its overall economic weight (which it would have to be as the Eurobonds would only be stronger than Irish bond issue if Germany was a vastly greater component in their foundation) we would only receive 1% of any Eurobond issue. To meet current Irish deficits, that would imply anything up to 1.8 trillion Euro in Eurobonds would have to be issued every single year. Id presume any new issue would require the agreement of all partners including Germany...and all participants would share in the servicing of those debts.

So to meet Irelands borrowing needs, everyone else would have to agree to borrow immense sums and find some use for them - which may or may not be in their fiscal plans, and with an inflationary effect across the wider Eurozone. Alternatively, having finally got its debt situation under control, Ireland may be forced to take on more and more debt to support Spain or Italy - its like all the lessons from the original Euro project were listed, and then promptly ignored.

Even if one assumes agreement could be found on the amount to issue between those who desperately need to borrow and those who want to keep their debt under control - if one presumes the existence of continuing national debt markets - why would Germany agree to borrow money via the Eurobonds when it can issue its own sovereign debt at lower rates of interest? When I ask that I am of course presuming that the Eurobonds wont move in perfect lockstep with national bonds as the author presumes they will - afterall, how can one determine the interest rate nations can issue debt at until they have issued it?

Im not convinced, the proposal dodges the real issue: real relief for the periphery is going to require real action by the core - the core will need to pay, the periphery will need to reform. Is that politically possible? Doubtful - the core doesnt want to pay, and the periphery deeply resent having to reform. The core might be forgiven not wanting to take on the role as the stern taskmasters - the Greek jibes about Germany and the Nazis are sullen, cold, bitterness and do more to harm the European project than even the collapse of the Euro would. Why would the core volunteer to be the bad guys for every peripheral politician too immature to deliver the truth to their voters? Even in good-boy Ireland, the common dogma is still the belief that we can default AND still run an 18 billion deficit every year until revenue catches up, somehow...

Will the result of real action and real reform, if politically possible, still be overall win-win, yes, I think so (Germany after all, through the Euro, has managed to lock the flabby, lazy, unproductive periphery into a deathmatch with a lean, mean Teutonic exporting cagefighter with no devaluation tapouts so theyve done very, very, very well out of the Euro - not that any German politicians have done the groundwork of telling them that) but not in the format proposed here.

It would be more realistic if the EIB were to simply issue eurobonds, which it would then use to buy sovereign debt in the Eurozone: aiming for a weighted basket to maintain overall sustainability, but with allowances for support of members under IMF style conditionality.

southsiderosie

Sticky_Fingers wrote: »

hmmm, I have major problems with your argument:

A far as I remember we were able to borrow at low rates due to a unprecedented boom that this country experienced during the late 90's early 00's right when the Euro went on stream. Shortly after the real boom ran out of steam only to be replaced with the faux one fueled by the low interest rates as a result of our Euro membership.

But that time period was also notable because of the level of fiscal constraint on the part of the government - largely to meet the convergence criteria of the eurozone.

Sticky_Fingers wrote: »

Therefore the low interest rates created in part by our membership of the Euro is a critical cause of the crash we now face. Had we not entered the Euro and had been able to set our own realistic intra bank interest rates we may have been able to put the brakes on sooner then we did (or be forced to by the markets sensing a slowdown). It is unlikely that there would have been any housing bubble if not for the Euro and if there had it most certainly would not have taken on the catastrophic proportions it finally did.

It didn't help that the government not only did not use tax and other policy tools to cool the overheated housing market, they threw petrol onto the fire by fiddling with the old tax system. Not to mention the fact that Ireland's debt crisis would have bene FAR more manageable without the bank guarantee.

Sticky_Fingers wrote: »

Good, hallelujah and praise Jesus that we will never be able to return to the bad old days of low interest repayments. This is a good thing because if the last decade has taught us anything it is that we as a nation have a problem with self control. We are not a major economic power that deserves cheap interest rates, we never were and never will be.

I agree with the lack of control part, which is why tying Ireland's hands under a eurobond scheme is somewhat appealing. Clearly policymakers need some kind of outside objective/carrot, as these have been the only time in modern Irish history where the government has run responsible fiscal policies.

Sticky_Fingers wrote: »

As opposed to the extraordinary and unbearable situation we now reside in where a property bubble was propagated by low interest rates and shoddy lending practices. I never want to see another housing bubble again in this country, if that means that I will have to suffer a 10-15% mortgage to ensure that I am not paying over the odds for a house whose price has been distorted by a massive credit surplus then so be it.

Ergh, those interest rates will absolutely murder SMEs and entrepreneurship, which Ireland desperately needs more of.

Sticky_Fingers wrote: »

Neither is further integration where we become a small and probably neglected cog in a much bigger machine designed for the benefit of our neighbours. Again I call upon history and say that the low interest rates of the past were designed solely for the benefit of the sluggish Franco-German economies not for ours. I don't want a Eurobond because it's rates will have little our no bearing on what this country needs only on what suits Paris or Berlin.

But does Ireland need an outside straitjacket or not? Because the tradeoff there is that in turn for monetary stability, Ireland HAS to keep its fiscal house in order. Either there is going to be externally unmaneagable exchange rate volatility if Ireland does the unthinkable and goes it alone, or it is going to have to resign itself to casting its lot with the rest of Europe and managing its small corner of the eurozone like a responsible adult country, not a teenager who just got her first credit card.

Sticky_Fingers wrote: »

How many MNCs would stick around once we are forced to increase our CT rate as a condition of membership of the Eurobond?

Hoe many domestic business can grow and thrive with 15% interest rates?

Scofflaw

southsiderosie wrote:

I agree with the lack of control part, which is why tying Ireland's hands under a eurobond scheme is somewhat appealing. Clearly policymakers need some kind of outside objective/carrot, as these have been the only time in modern Irish history where the government has run responsible fiscal policies.

It would be nice to be able to disagree with that, but the evidence is on your side.

glumly,
Scofflaw

later12

Sand wrote: »

the interest rate on any bond is determined more by what the issuer can get the bond issue fully subscribed at rather than as the result of a maths formula. The maths might say X, the market might say Y. What happens then? Assuming the bond issue was to sustain a need then the interest rate is going to be whatever the market sets to meet that need.

The weighting process applies to the fee charged to constituent borrowing governments, not to the EIB bond auction. The EIB would auction its debt in the normal way, and in onlending debt to any member state, would charge its fee and then add on a surcharge (or even subtract an allowance) to account for things like observed yields or credit ratings.

The coupon that De Grauwe and Moesen refer to is the coupon paid by the constituent European borrowers, and enjoyed by the EIB. It is not the coupon paid to EIB creditors through the purchase of EIB debt. That latter coupon would, of course, be determined elsewhere.

Secondly, its unclear, but this interest rate=weight average maths solution seems to imply a continuing or existing national government bond market running alongside the the Eurobond issues.

Not necessarily. I see no reason for national bond auctions to continue per se, there is the possibility of having two different debt tranches for each constituent borrower - one lower tranche with common, pooled responsibility and a low risk similar to T-Bonds, and one higher tranche with national responsibility and higher risk weight - but all members' borrowings would be met via the EIB in the first instance.

So if we presume Irelands weight is in line with its overall economic weight (which it would have to be as the Eurobonds would only be stronger than Irish bond issue if Germany was a vastly greater component in their foundation) we would only receive 1% of any Eurobond issue.

No, we would borrow on the lower tranche, covered by a 'joint & several' clause until we reached our weighted limit, and everything thereafter would be borrowed at the marginal rate by us directly, via the EIB. So if we wanted to keep our debt at such a high level, we should literally be paying through the ceiling for that choice.

Also, obviously the conversion of European debt would be over a gradual period going into its debt profile, not overnight. I don't see the problem that you appear to see here.

What is really relevant is is the EIB's equity ratios and the fact that its basic debts are guaranteed by member states, not whether or not all of its credit extends to all constituent borrowers in an exactly proportional fashion.

Sand

@Later10

The weighting process applies to the fee charged to constituent borrowing governments, not to the EIB bond auction. The EIB would auction its debt in the normal way, and in onlending debt to any member state, would charge its fee and then add on a surcharge (or even subtract an allowance) to account for things like observed yields or credit ratings.

That would make sense but it doesnt appear to be what the authors propose. Theyre using the same weighting (based on equity shareholding in the EIB) multiple times:

First, each euro government would participate in the issue on the basis of its equity shares in the EIB. Second, the interest rate (coupon) on the euro bond would be a weighed average of the yields observed in each government bond market at the moment of the issue. The weights would also be given by the equity shares in the EIB. Third, the proceeds of the bond issue would be channeled to each government using the same weights. Fourth, each government would pay the yearly interest rate on its part of the bond, using the same national interest rates used to compute the average interest rate on the euro bond.

Now either theyre explaining themselves atrociously, or theyre saying the coupon on the Eurobond issue will be determined by a weighted basket of national government bond yields, and the same weighting will determine the channelling of the proceeds and the liability for servicing the bond.

Theyre talking about a direct issue and a split of the proceeds from a given Eurobond issue, not for the EIB to borrow at market rates and to lend on to national governments seperately.

The coupon that De Grauwe and Moesen refer to is the coupon paid by the constituent European borrowers, and enjoyed by the EIB. It is not the coupon paid to EIB creditors through the purchase of EIB debt. That latter coupon would, of course, be determined elsewhere.

I dont believe so - The talk about the coupon in the "Second..." point and then talk about the payments due from each government in the "Fourth..." point. I believe theyre interchangeable because they use the same weighting, but it still indicates that they believe the coupon will be set as the result of the weighting rather than market demand.

Not necessarily. I see no reason for national bond auctions to continue per se, there is the possibility of having two different debt tranches for each constituent borrower - one lower tranche with common, pooled responsibility and a low risk similar to T-Bonds, and one higher tranche with national responsibility and higher risk weight - but all members' borrowings would be met via the EIB in the first instance.

Wouldnt it be necessary? Whatever they may have meant when discussing the coupon on the Eurobond, it is derived from the national bond market. Unless were going to lock in rates, national bonds would have to continue to be issued in a large enough scale to provide a useful sample.

And governments, especially those who feel they can meet their debt at a lower rate than is offered by the maths of the Eurobond will always have the incentive to test the water to see what they can really issue debt at.

No, we would borrow on the lower tranche, covered by a 'joint & several' clause until we reached our weighted limit, and everything thereafter would be borrowed at the marginal rate by us directly, via the EIB. So if we wanted to keep our debt at such a high level, we should literally be paying through the ceiling for that choice.

But then doesnt that (paying through the nose for debt) just repackage our current problem (inability to raise funds as a national sovereign) in new clothes? We'll be locked into a straightjacket where our borrowing will be dictated by the needs of the larger economies and like the Euro monetary policy we will wind up in a situation where the policy is either too cold or too hot. Our fiscal policy was one of the few economic tools that we had left, and now that too is going to be dictated to us on a schedule where what suits Germany or France is prioritised long before what suits Ireland is considered. Its an amplification of the Euro problem.

Our only relief at times of fiscal deficits which cannot be bridged by our "ration" from the EIB will be a national sovereign market where we wont be able to raise funds anymore easily than we would currently.

It just seems the authors have worked so hard to come up with a formula which would reassure Germany that it wouldnt be a transfer union that they have a Eurobond which would be at best useless. And it might actually wind up amplifying the destabilisation of minor peripheral countries which would be either starved of credit or flooded with it on an alternating schedule that suited the fiscal needs of the Franco-German core.

later12

Sand wrote: »

@Later10


That would make sense but it doesnt appear to be what the authors propose. Theyre using the same weighting (based on equity shareholding in the EIB) multiple times:



Now either theyre explaining themselves atrociously, or theyre saying the coupon on the Eurobond issue will be determined by a weighted basket of national government bond yields, and the same weighting will determine the channelling of the proceeds and the liability for servicing the bond.

They may be talking about a pre-determined coupon, but no I think you are reading not reading it correctly in suggesting that they are talking about an ongoing chanelling of the proceeds of debt auctions to all members, regardless of need. In saying the proceeds of the bond issue would be channeled to each government using the same weights, my reading of that would be that they will use the same weights to onlend a capital amount as were used in the determination of the coupon.

As for the pre-determined coupon, I don't think it particularly important. The point in linking to the De Grauwe and Moesen paper is simply to illustrate that a scheme can be established whereby the peripherals cannot simply take Germany for a ride, and whereby Germany can keep its borrowing costs low, relative to other Eurozone members.

Wouldnt it be necessary? Whatever they may have meant when discussing the coupon on the Eurobond, it is derived from the national bond market. Unless were going to lock in rates, national bonds would have to continue to be issued in a large enough scale to provide a useful sample.

One could use any number of methods to establish the initial fee. Credit ratings for example, using an internal CRA.

And governments, especially those who feel they can meet their debt at a lower rate than is offered by the maths of the Eurobond will always have the incentive to test the water to see what they can really issue debt at.

If the EIB were working correctly, and provided that the weightings are correct, and provided the debentures were guaranteed by a 'joint & several' agreement, and considering the increased liquidity enjoyed by these Eurobonds, then it is pretty inconceivable that the likes a core power like France or Benelux should be able to auction its debt independently at a lower coupon value.

But then doesnt that (paying through the nose for debt) just repackage our current problem (inability to raise funds as a national sovereign) in new clothes?

Not if in the initial stages the EIB bonds worked in the form of Brady bonds for outstanding peripheral debt.

If Eurobonds existed, it would be far easier for the likes of Ireland and Portugal to engage in a threat of a hard restructuring of their historic external debts. Current holders of Irish debt could, and I would suggest would, then engage in a process whereby they could swap their Irish sovereign indentures for EIB bonds - just like as happened with Brady bonds in Latin America. This would amount to a write down of the principal on the Irish debt.

We'll be locked into a straightjacket where our borrowing will be dictated by the needs of the larger economies

Fantastic, if that were the case (which I'm not convinced about). Our borrowing will actually be restricted by cost, should a marginal rate of borrowing apply to the upper tranche - however, a restriction of Irish sovereign borrowings is something to appeal for, in my opinion.

Sand

@Later10

They may be talking about a pre-determined coupon, but no I think you are reading not reading it correctly..

To save going round in circles we'll have to agree to disagree on that point.

The point in linking to the De Grauwe and Moesen paper is simply to illustrate that a scheme can be established whereby the peripherals cannot simply take Germany for a ride, and whereby Germany can keep its borrowing costs low, relative to other Eurozone members.

But the problem is, Germany has to be taken for a ride for there to be much point in issuing Eurobonds. The periphery requires a bailout to avoid default. A pseudo "bailout" has already been tried, and failed. To maintain a Euro without sovereign default requires a transfer union where the core will buy up and write off peripheral debt - thats just a cold harsh political reality. If Germany isnt willing to engage in a transfer union (and every indication so far is that it is not - and indeed cannot, due to its constitutional laws against taking on the debt of another country) then by a process of elimination we are left with a default.

The authors work here is "interesting" but a Eurobond that is designed to assure Germany that it wont be taken for a ride will be far more dangerous than it will be useful.

One could use any number of methods to establish the initial fee. Credit ratings for example, using an internal CRA.

If the EIB borrows money to lend stupidly (i.e. ignoring politically inconvenient market signals/credit ratings) then its own ability to raise funds at reasonable rates will be endangered. An internal CRA wouldnt be considered anymore reliable than a political mouthpiece - especially being founded precisely because the politicians didnt like the answers they are getting currently and want an agency that will give them answers they do like.

If the EIB were working correctly, and provided that the weightings are correct, and provided the debentures were guaranteed by a 'joint & several' agreement, and considering the increased liquidity enjoyed by these Eurobonds, then it is pretty inconceivable that the likes a core power like France or Benelux should be able to auction its debt independently at a lower coupon value.

Well - theres a lot of ifs there, and national sovereign debt of Germany will always be considered less risky than the debt of a supranational agency.

Under sufficient strain, a supranational agency might be torn apart by political and economic pressures. Germany on the other hand is unlikely to vanish from the map. Germany will also be able to act much more decisively to protect its own particular creditors and to make its own fiscal decisions. On the other hand the EIB is going to be a supranational organisation and a major crippling hinderance to the Euro response over the past three years has been a decision making process incorporating 17 countries, plus interested bystanders.

Not if in the initial stages the EIB bonds worked in the form of Brady bonds for outstanding peripheral debt.

There doesnt appear to be any indication that Germany is ready for anything of the sort - the authors themselves admit its a political reality and its underlying their quest to create a eurobond without purpose.

If Eurobonds existed, it would be far easier for the likes of Ireland and Portugal to engage in a threat of a hard restructuring of their historic external debts. Current holders of Irish debt could, and I would suggest would, then engage in a process whereby they could swap their Irish sovereign indentures for EIB bonds - just like as happened with Brady bonds in Latin America. This would amount to a write down of the principal on the Irish debt.

Current holders of Irish debt could, and I would suggest would, then engage in a process whereby they could swap their Irish sovereign indentures for EIB bonds - just like as happened with Brady bonds in Latin America. This would amount to a write down of the principal on the Irish debt.

How could it when the authors have gone to such extents to ensure Ireland will pay its fair share, based of its (awful) sovereign debt rates, so as to ensure Germany is not taken for a ride? What would essentially happen is we would be swapping Irish sovereign debt issued at low rates we enjoyed in 2001-2008 for Eurobonds where wed be paying interest rates calculated of our current horrific market rates. This might be a fantastic deal for anyone who issued debt to Ireland at low rates, as theyd be able to trade up to a much higher interest rate than they initially bargained for but it wouldnt reduce Irelands debt burden - if anything it would increase it.

Lets not forget that Brady bonds came into existence to deal with the fallout of a spate of Latin American defaults that had already occured. The timing is important, because youre arguing that Ireland, Greece, Portugal, Spain, Italy, Belguim can realistically threaten to default to bounce creditors into an agreement to take on debt which will be backed by either the peripheral countries threatening to default, or their fellow euro zone members who will be approving their threats to default. This wasnt the case with the USA: It wasnt threatening to default, and it wasnt supporting others threats to default.

If the main selling point of the Eurobonds is going to be thats it backed by the Eurozone governments that will never ever default or allow a default - whatever about the reckless periphery - then threatening to default as leverage is going to undermine that selling point.

Not that I disagree with taking a hard line in negotiations - dropping our pants and bending over the table hasnt really worked - but it would be insanely dangerous to presume it would be costless or a win-win.

Fantastic, if that were the case (which I'm not convinced about). Our borrowing will actually be restricted by cost, should a marginal rate of borrowing apply to the upper tranche - however, a restriction of Irish sovereign borrowings is something to appeal for, in my opinion.

Our borrowing is actually restricted by a cost already - its called the interest rate. But it hasnt stopped this drama from happening.

This is the core mistake, warmed up and repeated from the Euro project. Put in harsh conditions, straightjacket decision making and presume it will bring the feckless periphery to heel, forcing them to act like good Germans.

Hasnt worked for the Euro, no reason to assume it will work for the Eurobonds.

later12

Sand wrote: »

But the problem is, Germany has to be taken for a ride for there to be much point in issuing Eurobonds. The periphery requires further bailout to avoid default.

The periphery does indeed require further bailout to avoid any form of default. But Eurobonds make a partial default more palatable - attractive even - since were official Eurobonds to be established, some of the most serious consequences of defaulting on debt by a sovereign can be toned down, since that sovereign is no longer intending to return to market - a bit like Ecuador a few years back.

Further bailouts, under a Eurobond scheme, would be a perplexingly unnecessary process. We already know that the EU Commission and the political leadership of the zone seem to understand the need to restructure peripheral debt, and as we see in the media today, this opinion seems to be seeping into the ECB. Eurobonds offer an attractive way of doing this, whilst keeping European debt volumes in check, and whilst ensuring credit access by crisis hit member states.

If the EIB borrows money to lend stupidly (i.e. ignoring politically inconvenient market signals/credit ratings) then its own ability to raise funds at reasonable rates will be endangered.

Not at all. Not under a process where the lower debt tranche for all individual Eurozone members is guaranteed jointly and severally by each member. It would resemble the EFSF - the EFSF, arguably, lends stupidly, and ignores credit ratings, and does the opposite of that which the market does, and not only is it a form of Eurobond, an EFSF bond is probably the most attractive sovereign product on the global market from the point of view of income and safety.

Why would one buy German bunds when one can have the same risk of a German bund, but at a higher coupon?

An internal CRA wouldnt be considered anymore reliable than a political mouthpiece

But the internal CRA would not be for the benfit of the buyers of European debt, it would only be for the benefit of the EIB in apportioning a fee in onlending its debt.

Possibly, the EIB could use external CRAs, like I said there are many options in determining a fee, this would hardly be a major difficulty to overcome.

Well - theres a lot of ifs there, and national sovereign debt of Germany will always be considered less risky than the debt of a supranational agency.

But this EIB debt - specifically that lower tranche - would be guaranteed by Germany under the terms of the agreement. The fact that the lower debt tranche also happens to be guaranteed by the other 16 members does not make it any more risky.

There doesnt appear to be any indication that Germany is ready for anything of the sort - the authors themselves admit its a political reality and its underlying their quest to create a eurobond without purpose.

Nobody here can say what is or is not going through the minds of political leaders, all any of us can debate is what is or is not a good idea in principle, and why it ought, or ought not, to be taken seriously. I don't know if Eurobonds are as yet something that the Germans are seriously considering, the German finance minister seemed open to the idea during the Spring, but I don't see the point in reading tea-leaves on that issue.

The Eurobond proposal - as proposed by many different institutes, politicians and economists - is a prospect that many people quite rightly think ought to be pursued. It has some strong precursors, and some strong economics and financial arguments in its favour. Whether or not it will be taken up now or later is impossible to say.

What would essentially happen is we would be swapping Irish sovereign debt issued at low rates we enjoyed in 2001-2008 for Eurobonds where wed be paying interest rates calculated of our current horrific market rates.

No, the argument is for the fee to be charged to a country to be weighted by some measuremnet, such as a credit rating or an observed yield - not for it to be the equivalent of an observed yield. Also, under most proposals that I have seen, there would be two tranches of debt for each state, an upper and a lower tranche, each with two different methods of calculating the cost of borrowing.

Lets not forget that Brady bonds came into existence to deal with the fallout of a spate of Latin American defaults that had already occured. The timing is important, because youre arguing that Ireland, Greece, Portugal, Spain, Italy, Belguim can realistically threaten to default to bounce creditors into an agreement to take on debt which will be backed by either the peripheral countries threatening to default, or their fellow euro zone members who will be approving their threats to default. This wasnt the case with the USA: It wasnt threatening to default, and it wasnt supporting others threats to default.

I don't think it matters, actually. I don't see any logical reason as to why the timing should matter - in reality any form of default will have to be in co-operation with Europe, be that pre or post Eurbond issues.

It would be helpful, during the establishment of Eurobonds, for the peripheral governments to strike an agreement with Europe on restructuring peripheral debts, upon which CRA downgrades would not matter a damn because the sovereigns in question would literally be riding away from the capital markets for good. The 'joint & several' backing of the EIB would make any downgrade of the EIB simply incredible, not to mention the inherent attractiveness of such an institution as the herald of the Euro as a world reserve currency.

Our borrowing is actually restricted by a cost already - its called the interest rate. But it hasnt stopped this drama from happening.

No. Surely the point is that when the borrowing was executed, there was little to no cost restriction; the convergence of borrowing costs in Europe over the past 15 years was disastrous. Eurobonds, should they be managed correctly by the EIB, would help to keep debt levels under control throughout the Eurozone. We would not simply have to hope blindly for investor/market efficiency and watchful CRAs.