The Eurobond is not Worth the Fight, the ECB is the Key

There is only one suitable instrument to address our current crisis, the European Central Bank. In order to deal with the emergency, states should issue securities with no maturity with an interest rate close to zero.

These days, the battle in Europe seems to be focussed mainly on Eurobonds, i.e. debt securities issued by an institution of the euro group that enjoy a common guarantee from the member states and are therefore considered safe by the markets and can be sold with very low interest rates. Certainly a solution of this kind would help, and would fit in with the perspective of an EU that wants to strengthen the links within it and proceed with a view to building ever greater unity.

But Eurobonds, admittedly, granted that an agreement was found to launch them, would not be on the market in a few days. When the President of the Commission, Ms von der Leyen, talks about the necessary guarantees, that is no excuse to obstruct them, or at least cannot be the lone reason. There is nothing that cannot be resolved, if one wishes, but not in five minutes, just as it is not possible in a further five minutes to place massive amounts of these bonds in the market.

Then, it should be well assessed whether Eurobonds are not disorienting for the public securities that will continue to be issued by individual states; and whether the guarantees placed at their service do not weaken the capital position of the states that offer these. In short, technically complex work that would take at least a few months, if, surprisingly, they were approved tomorrow. It is not a suitable instrument for dealing with an emergency such as the one that has hit us, which requires immediate action.

There is only one suitable instrument to address our current crisis, the European Central Bank. In order to deal with the emergency, states should issue securities with no maturity with an interest rate close to zero, and these securities should be purchased by the ECB. It is what it calls “debt monetisation”, and it is equivalent to printing banknotes. The Treaties and the statute of the ECB prohibit it, but in an extraordinary situation like this, some mechanism to circumvent this prohibition could and should be found. Otherwise, it would be like forbidding firefighters to pour water on a burning house because that would ruin the parquet floor.

That this is a necessary move is now affirmed by many economists, even those of great fame such as Paul De Grauwe, even those who until yesterday have preached austerity, such as Francesco Giavazzi

and Guido Tabellini. But the list of supportes of this idea would be long. Among politicians, on the other hand, one seems to be afraid to even mention the idea. I may be wrong, but it seems to me that only Stefano Fassina, an Italian economist and member of Italy’s Chamber of Deputies, immediately and emphatically supported this solution.

The purchase of bonds by the ECB without maturity , amounting to at least 10% of the GDP of each member state, would be a financing that can be implemented in the very short time that the crisis requires and that would not further aggravate the debt-to-GDP ratio, already destined to soar due to the inevitable reduction of the denominator (i.e. GDP). Moreover, it would be at almost zero cost.

What are the obstacles? The old story that printing money feeds inflation? Those who say so today would be ridiculed, because the history of the last decade has shown that there is no automatic link between the amount of money in circulation and inflation. Not to mention that there is now the opposite risk, namely that of deflation, against which it is much more problematic to fight. Furthermore, it must be borne in mind that all the world’s major central banks are creating vast amounts of money, which proves that this is the correct strategy in this situation.

The real obstacles in the European Union are ideological ones: if someone makes this proposal, they will certainly find opposition from the usual “no countries”. But if Italy has managed to involve as many as 14 countries in the request for Eurobonds, it should correct the pitch and convince them that this is the best way forward. It is impossible to predict what will happen now, but this time we are not isolated in saying that the responses of the “no countries” are completely inadequate to the problems currently confronting the euro zone.

There is plenty of time  to create and initiate eurobonds. This initiative could be a litmus test to see whether we really want to move forward in European integration or whether this EU should just be a market in which the various states, instead of helping each other, try to prevail even at the expense of their neighbours.

Carlo Clericetti

Giornalista - Collaboratore di "La" Membro dell'Editorial Board di Insight. Blog:

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