August 15th, 2011
05:30 PM GMT
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London (CNN) - "The name’s bond, euro bond."

It may not have the same cache as 007 but the joint eurozone bond is fast emerging as the weapon of choice for tackling a debt crisis that has gripped the eurozone for the past 18 months, and brought some member states to the brink of disaster.

As French President Nicolas Sarkozy and German Chancellor Angela Merkel hold crunch talks in Paris this week, investors are betting the only way of calming the region’s markets now is to pool the bloc’s bonds.

For the lack of fiscal cohesion is the fundamental issue facing the 17 nations that share the euro.

Yes, they may have a monetary union but without the same budgetary rules the markets do not view them as one.

The result: Countries like Italy have to pay more than 5% yields to borrow for ten years while Germany need only fork out 2.3%.

And as that spread grows, so too does the difference in opinions between those eurozone members that spend freely and the more prudent nations, who after saving for years, are loath to prop up their ‘poor’ cousins.

Even Robert Zoellick, head of the World Bank, has expressed his frustration in no uncertain terms. Speaking at a dinner in Sydney, Australia, he said the events of the recent weeks had caused "many market participants to lose confidence in economic leadership of some of the key countries."

Zoellick said a trend of acting on issues “a day late” had led to a situation where worry “has accumulated and so we’re moving from drama to trauma for a lot of the eurozone countries.”

So are euro bonds the answer?

It depends who you ask. For countries like Italy and Spain, whose yields hovered below 7% recently, euro bonds would indeed be a wonder cure.

Indeed, Italy’s finance minister Giulio Tremonti has said fiscal consolidation across the eurozone should have been a priority long ago.

But it’s hard to see the healthier, larger countries giving up their comparatively cheap access to open market financing.

If you are Germany and you can borrow at 2.3%, why pay more?

And German rhetoric hasn’t been encouraging on this issue. Wolfgang Schaeuble, the country’s finance minister, reportedly told Der Spiegel magazine that “there is no collectivisation of debt or unlimited support.”

What about a compromise?

The eurozone had around $13 trillion of debt at the end of last year, two thirds of which was issued by Germany, Italy and France.

It’s hard to see such huge chunks being re-issued overnight but think tanks such as Bruegel have proposed that euro bonds eventually make up 60% of that figure and the remaining portion in local denominations, whose yields would fluctuate depending on individual issuer’s economic policies—much as they do today.

Some 320 million people use the euro as their common currency. These are people with different jobs, culture, ages, incomes, taxes so it’s hard to see one magic potion to cure distinct ailments.

Countries like Spain have high unemployment and should not be forced to scrap their budget deficits to conform.

Sarzoky and Merkel say it is too early to discuss euro bonds, as the eurozone bloc does not have a unified fiscal framework. But you can bet the topic will be raised in the press conference after their meeting. And if the politicians don’t address it soon, the markets may well force the issue.

soundoff (5 Responses)
  1. warszawiak

    Well designed Eurobonds could magically change it all as they would also become most liquid instrument in the world.
    Why decent countries should bargain with organized speculators if they could bargain with EU core or ECB for the privilege of issuing Eurobonds? Paying extra 1%-3% would preserve all the incentives and eliminate the need of any transfer union – plain deal with fellow Europeans and most of all refusing mafia. Yes, big investment houses cannot make billions without a day loss all in fair play. There must be more than just trading skills.

    August 15, 2011 at 6:40 pm |
  2. Paul Johnston, PhD Economics

    GREECE IS THE PROBLEM & needs to leave the Euro Zone and NEVER SHOULD HAVE BEEN IN IT. Greeks lied about its figures to enter and is now dragging Europe and the Euro down... GET THEM OUT NOW BEFORE IT'S TOO LATE!

    Paul Johnston, PhD Economics

    August 16, 2011 at 1:41 pm |
  3. european

    The keyword is determination. The european nations need to show determination their to the euro and to the EU. They need to make clear that europe will stand as one and fall as one without a doubt. The EU needs stronger political unification (especially in the financial sector) and they need euro bonds! How should the markets have confidence in the EU and the euro if the member nations don't even have confidence in it themselves?

    August 16, 2011 at 2:10 pm |
  4. charles johnson

    I see the bond idea as a temporary solution. Ultimately, the EU will have to move towards a more Federal system similar to the U.S.. This is the only way to have control over all the nations borrowing that share the Euro. I believe the same problem will re-occur over and over again if adequate control of borrowing is not possible. The bond idea is a brilliant idea in the meantime and should reduce the cost of borrowing for nations like Portugal (where I live) to give them some hope of paying back some of the money owed.

    I do not see borrowing for every day expenses as a reasonable thing to do. Borrowing for capitol expenses make some sense, but never should support day to day expenses (like what is going on in the U.S. today)
    That is my opinion, I wonder what others think?
    Best regards. Charles

    August 17, 2011 at 3:22 am |
  5. Spoimbig

    sell bag party , for special offer

    July 12, 2012 at 10:58 am |

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