Is the ‘Euro Bond’ the Answer to the Euro Sovereign Debt Crisis? What Outcome Can Investors Expect Out of Europe?

The Journal of Wealth Management, Vol. 14, No. 4, pp. 11-21, 2012

28 Pages Posted: 6 Feb 2012

See all articles by Kenneth N. Matziorinis

Kenneth N. Matziorinis

McGill University - School of Continuing Studies

Date Written: December 8, 2011

Abstract

This paper analyzes the causes of the sovereign debt crisis in the eurozone and examines the policy alternatives confronting euro area governments. It suggests that pooling fiscal risks, creating an EU Treasury and issuing jointly-backed euro bonds is an optimal solution and the inevitable conclusion of the economic integration project in Europe. It examines the advantages and disadvantages of euro bonds and concludes that issuing euro bonds can transform a market that is fragmented along national lines into a single unified European government bond (EGB) market that can have the depth, breadth and liquidity to match the US Treasury market. By enhancing the size and liquidity of the EGB market it can become possible for global investors and wealth managers to use euro bond instruments as a tool for payment or transactions needs as well as short-term precautionary and investment balances that can increase the demand for them and lower their yields. This development can enhance the euro’s ‘safe haven’ status and enable the Euro area to extract seigniorage benefits similar to those that the US has enjoyed in the post war period that should reduce funding costs even for fiscally strong euro area countries. It can also consolidate the euro as one of the world’s two principal reserve currencies. The risk that fiscally weak area countries might take advantage of low borrowing costs to increase debt can be easily and effectively mitigated by agreeing on a formula that will establish an escalating rate in the sharing of interest costs that will be proportional to their debt-GDP ratio. Thus moral hazard is mitigated, the disciplining role of the markets is internalized and incentives are created to reduce debt and increase income.

Keywords: Europe, euro, sovereign debt, crisis, seigniorage, ECB, EMU, EU, Greece, Eurozone, economic integration, EFSF, euro bonds, moral hazard, fiscal integration, bank leverage, European banks, Italy, Germany, stability and growth pact, ESM

JEL Classification: E42, E44, E58, E61, F02, F15, F33, F34, F36, F55, F59, G01, G12, G15, H12, H63, N24

Suggested Citation

Matziorinis, Kenneth N., Is the ‘Euro Bond’ the Answer to the Euro Sovereign Debt Crisis? What Outcome Can Investors Expect Out of Europe? (December 8, 2011). The Journal of Wealth Management, Vol. 14, No. 4, pp. 11-21, 2012. Available at SSRN: https://ssrn.com/abstract=1999518

Kenneth N. Matziorinis (Contact Author)

McGill University - School of Continuing Studies ( email )

688 Sherbrooke Street West, Room 1140
Montreal, Quebec H3A 3R1
Canada
514-884-6962 (Phone)
514-398-3108 (Fax)

HOME PAGE: http://www.mcgill.ca/conted/

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