Eurobonds can be made to work

Why Otmar Issing' s argument is wrong.

Otmar Issing's "Slithering to the wrong kind of union" (Financial Times, August 9)
carries the authority of a former member of the executive board of the
European Central Bank and is forceful in key regards. He has reason to
claim that the ECB's purchase of national bonds since the July 21 summit
is in breach of existing treaty provisions and implies control of
eurozone governments in a manner that lacks democratic accountability.
He also claims that this may be a step in the direction of a European
common bond.

Yet he is wrong in claiming that such a bond need imply higher interest
rates, fiscal transfers and "taxation without representation". In the FT
of July 4 ("A plan to save the euro, and curb the speculators") Giuliano
Amato and Guy Verhofstadt argued that Union bonds or eurobonds could be
introduced without debt buy-outs or member state guarantees or fiscal
transfers. The precedent is the European Investment Bank, which has
issued bonds for 50 years without them and has been so successful that
it now is more than twice the size of the World Bank.

Mr Amato and Mr Verhofstadt also proposed that a transfer of
Maastricht-compliant debt of up to 60 per cent of national gross
domestic product could be to a Union debit account that was not traded.
Its interest rates thereby could be decided on a low and long-term basis
by eurozone finance ministers rather than rating agencies and strengthen
rather than undermine governments. In parallel, net issues of eurobonds
would attract funds from the central banks of the emerging economies and
sovereign wealth funds, which would be inflows to the EU rather than
fiscal transfers within it.

It may be for such or similar reasons that Sigmar Gabriel, general
secretary of the SPD, recently called on Angela Merkel to support
eurobonds. For the Amato-Verhofstadt proposal would avoid the ECB or the
European financial stability facility breaching treaty commitments
through debt buy-outs, would avoid the risk of a challenge to this by
the German constitutional court and would not need the sovereign
guarantees or fiscal transfers to which so many SPD members of the
Bundestag as well as those of the CDU and FDP governing coalition are

(Letter to the Financial Times, 16 August 2011)

Stuart Holland

Formerly adviser on European affairs to Harold Wilson, Jacques Delors and Antonio Guterres. Currently Visiting Professor in the Faculty of Economics of the University of Coimbra. His new book "Europe in Question – and what to do about it" is published as an eBook by Spokesman Press and available on Amazon.