However, the most obvious single step that would instantly make the euro more attractive to world investors is one that leaders have fallen out over many times before and are likely to again: large-scale joint borrowing.
“If Europe is going to offer investors an alternative, it needs to increase the size of the Eurobond market dramatically,” former International Monetary Fund Chief Economist Olivier Blanchard and Ángel Ubide, economist at Citadel, wrote last month in a joint paper, which has drawn much admiring commentary, including from senior figures at the ECB.
The paper revives a proposal first made in 2010 to divide the government debt market in two: all national government bonds up to 60 percent of gross domestic product would be swapped into ‘blue bonds’ guaranteed by the EU, while member countries would stay responsible for all the debt above that level (‘red bonds’).
In theory, this would allow Europe to create, at a stroke, a large, liquid pool of safe assets that would finally offer global investors a real alternative to buying U.S. Treasuries: something that offers a steady return with no credit risk, something they can hold forever or turn into cash in an instant if need be, somewhere to park their money while looking for the next big investment in stocks or real estate, something to use as collateral for their next loan. The absence of a large market for such assets today means that it is gold, rather than the euro, that has benefited from the dollar’s weakness since the start of the year.
This time is different?
Joint debt has long been an option for making Europe’s capital market more attractive and competitive, but it has always been contentious. During the eurozone sovereign debt crisis, leaders notably from Italy and Spain pushed for Eurobonds, trying to bring down their borrowing costs. It never happened because their frugal northern neighbors, led by Germany and the Netherlands, argued that that would leave them on the hook for spending they never approved.
The EU has tried to address such ‘moral hazard’ by creating and policing a set of rules that would cap national governments’ borrowing. But those rules were suspended during the pandemic and have only been restored in a fashion that is watered-down and hard to enforce.
