Euro Bonds: A Potential Catalyst Towards Bringing Fiscal Union to Europe

Clarification for why I write about the European sovereign debt crisis for new readers: There are a lot of people who believe that the European Union could someday be a significant End Times player. If the European Union were to become a significant End Times player it would likely need to have much more political cohesion amongst its member countries than it has now. The process to create more political cohesion in Europe is a complicated one that is likely going to require more cohesion in areas like fiscal policy (taxation and spending) first as political union often represents the final step of integration.

I sometimes write about issues relating to the ongoing European sovereign debt crisis because I believe the crisis is a potential catalyst that could push European leaders to agree to more cohesion in areas like fiscal policy. In other words, the ongoing turmoil in Europe is a potential event that could help Europe become more like the Europe that many people envision it will resemble during the End Times. With this clarification out of the way, I now share today’s article relating to the European sovereign debt crisis.

I mentioned at the beginning of my previous article that I was “close to publishing a different article about Europe’s potential move towards fiscal union and eventually political union”. Today I publish much of what I intended to publish before news about Sarkozy and Merkel’s Tuesday meeting came out.

A couple days ago French President Nicolas Sarkozy and German Chancellor Angela Merkel announced a proposal to create an economic government in the Eurozone (the countries of the E.U. which utilize the Euro as their currency). The proposal came at a time when observers hoped that the meeting between Sarkozy and Merkel would bring a potential solution to the ongoing European sovereign debt crisis. While Sarkozy and Merkel showed willingness to move Europe towards the path of fiscal union by offering to create an economic government in the Eurozone, Merkel and Sarkozy disappointed many observers because they rejected calls to pursue certain measures that observers believe have the potential to alleviate the financial stress that countries like Italy and Spain are currently enduring.

The talk among European economic writers and commentators during the past several days has centered on the possibility of European leaders eventually agreeing to create Euro Bonds, a bond that is jointly-issued and jointly-backed by all the countries which utilize the Euro.

• Many observers believe that the creation of Euro Bonds would be a major step towards stemming the European sovereign debt crisis. Proponents of Euro Bonds argue that Euro Bonds would enable the weaker countries of Europe to borrow at lower rates than what they could normally borrow at individually. The lower borrowing costs would help to alleviate financial pressure on countries like Italy and Spain-whose borrowing costs reached unsustainable levels recently; requiring emergency action by the European Central Bank.

The following video further explains what Euro Bonds are and highlights some of the positions certain European countries have towards the creation of Euro Bonds, including Germany and France's opposition to them.

The topic of Euro Bonds may not sound too interesting to a lot of people who do not follow economic and financial issues on a daily basis. However, I think it would be wise to pay some attention to the Euro Bonds issue if you hear about it while watching, listening, or reading the news because the Euro Bonds issue is relevant to assessing the E.U.’s progress towards fiscal union (the harmonization of taxation and spending policies among E.U. member countries and the step before political union) I believe the Euro Bonds issue is relevant because the creation of Euro Bonds would lay the groundwork towards the creation of fiscal union.

• For instance, many suggest that one major item European leaders would likely need to agree upon to have Euro Bonds is the creation of a new European department that oversees the issuance of bonds, issues guidelines to member countries and enforces rules on member countries to make sure they fix their respective fiscal situations, and works to ensure that member countries can repay money they’ve borrowed individually and collectively. Dirk Schumacher, a senior European economist at Goldman Sachs, alludes to the necessity to create this department in the following statement (italics added by me):

“An introduction of a euro bond would make it necessary to change the constitution of several countries, including Germany, and would require at the least a further change of the institutional set up of the euro zone with more oversight and control from Brussels,”

The European Union will not have complete fiscal union until they have a common spending and taxation policy among their member countries. However, the formation of a new European department whose responsibilities are the same or similar to the ones mentioned above would establish the institutional infrastructure to enable a common spending and taxation policy to arise quickly if/when European leaders agree to such policy. In other words, the formation of a new European department whose responsibilities are the the same or similar to the ones mentioned above would set the stage for fiscal union if/when European leaders agree to it.

On the day of this writing (August 18, 2011), European stocks had the biggest one-day decline since March 2009 and fears about the solvency of several European countries increased. If the crisis continues to worsen in Europe, France and Germany-the two main opponents of Euro Bonds-may be forced to agree to create Euro Bonds to stop the crisis from destroying European economic unity. If/when that happens the likelihood for fiscal union (and eventually political union) to arise in Europe increases significantly.