A Better Name for Eurobonds


I've previously mentioned the proposal of John Muellbauer, Paul De Grauwe and others for eurobonds with conditions--no silver bullet, but still I think Europe's best way out of the present mess. The idea combines a measure of debt pooling (the minimum needed to restore confidence) with incentives for better fiscal behavior and compensation for the creditworthy countries that might otherwise face higher borrowing costs. It's elegant and, I believe, workable. But Germany has said eurobonds won't happen.

In today's FT Muellbauer restates the case with presentational improvements. He suggests calling these new pooled instruments "euro insurance bonds".

Think of car insurance: just as bad drivers with accident records pay higher risk premiums, so countries with weak fundamentals would pay a higher interest rate on their euro insurance bond issue into a central insurance fund. For outside investors, however, all such bonds would trade at the same price...

Insurance companies usually demand an "excess", with drivers covering the first part of accident costs themselves, to protect against moral hazard. In the same way, countries issuing euro insurance bonds would post collateral with a central insurance fund--a eurozone debt management agency--in the form of gold and foreign exchange reserves, in proportion to their euro insurance bond debt issue...

In the event of a future default or debt writedown, the build-up of payments in the insurance fund, plus the collateral, would be available to those countries underwriting the joint euro insurance bond issue. This would negate German fears of a "transfer union".

I'm skeptical about governments posting collateral, because I don't think the threat to seize it is politically credible. Also, "negate" is too strong. But an arrangement with side-payments or "premiums" would do the job while going at least some of the way towards answering Germany's concerns.

The plan could be blended, Muellbauer argues, with the redemption pact proposed last year by Germany's council of economic experts, which Angela Merkel is at least no longer ruling out. I'm not sure why you would want to combine them, except to let Germany feel it was getting its way. The conditional eurobond is a better answer than the redemption pact--which is too severe, relies too much on non-credible sanctions, and offers too few incentives upfront. In any case, you don't need both. The conditional eurobond is the crucial innovation.

Sorry, did I say "eurobond"? I meant "euro insurance bond".

Jump to comments
Presented by

Clive Crook is a senior editor of The Atlantic and a columnist for Bloomberg View. He was the Washington columnist for the Financial Times, and before that worked at The Economist for more than 20 years, including 11 years as deputy editor. Crook writes about the intersection of politics and economics. More

Crook writes about the intersection of politics and economics.

Get Today's Top Stories in Your Inbox (preview)

What Do You See When You Look in the Mirror?

In a series of candid video interviews, women talk about self-image, self-judgement, and what it means to love their bodies

Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus


Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.


What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.


Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.


Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.


Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.


The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air



More in Global

Just In