Guardian.co.uk

Jacques Delors, Pervenche Berès, Yves Bertoncini and Daniel Cohen , Tuesday 18 October 2011

Jacques Delors, Pervenche Berès, Yves Bertoncini and Daniel Cohen: To restore confidence, we need a financial surge of eurobonds in the short term and union bonds to cement the EU’s future 

Unless the sovereign debt crisis is addressed at its root, it is going to threaten the eurozone, which was conceived for stability in the midst of global disorder. Whatever the decisions in favour of banks’ recapitalisation may be, it is essential for the EU and the economic and monetary union to have more constraining rules as well as more financial means to consolidate the European and international role of the euro.

In this perspective, the often mentioned creation of « eurobonds » would play a crucial role in the short term and would permanently strengthen the eurozone’s overall architecture. But to make progress, we need to accurately identify the challenges facing the eurozone and the 27-strong EU, mobilising two different kinds of bonds serving two different purposes.

Eurobonds issued by the European stability mechanism

First of all, it is important to confirm that the eurozone is the priority framework for joint responsibility and solidarity among the 17, all of which are facing a debt crisis shared with a majority of the world’s industrially advanced countries. The launch of the European financial stability facility is a first sign, as indeed is the establishment of the European stability mechanism (ESM) for 2013. The ESM must now serve as the technical and political basis on which to build a more effective arrangement.

The ESM treaty plan provides for an endowment capital of €700bn (€80bn of which would consist of paid-up capital) and capacity for intervention worth €500bn. These sums must be increased if we are to smash the speculation that targets member countries.

A reasonable goal would be to allow the ESM to issue approximately 3 trillion medium-term « eurobonds » on the markets, starting with the same endowment capital – in other words, the kind of sum that can take on the current and potential challenges generated by the debt crisis. This way, it would have resources available to it worth around 30% of the eurozone’s overall GDP, so that this increased solidarity would not prompt member states to shirk their responsibilities: in order to benefit from the ESM, they would have to continue pursuing structural reform, each in accordance with its specific issues. This would allow the eurozone to enjoy a comprehensive indebtment level (85% at the end of 2010) far lower than that of the US, Japan or the UK.

This mechanism would have a cost, particularly for Germany, in terms of endowment capital and of the potential rise in the interest rate that is the means for purchasing these bonds. But that cost will be mitigated by the effects of scale associated with a European bond market whose liquidity would be comparable to that of the market in bonds denominated in dollars, and this would help the euro at the international level.

Overall, the cost will seem limited by comparison with the costs generated by the sluggishness and the flaws in European co-operation since the start of the crisis. Issuing eurobonds will have to stimulate an improvement in the executive and parliamentary governance of the eurozone.

Union bonds issued by the European Investment Bank

European bonds must also be issued for the EU 27, the right framework for the development of future spending and therefore of European co-operation. Europe’s requirements in the field of the environment, energy infrastructures, transport and communication are common knowledge.

But a deficit in co-operation is precisely what has been holding back investments for the past 20 years; in light of the lasting deterioration of the national public finance picture, the issue of European bonds is the only thing capable of inspiring the necessary investment dynamic needed to create jobs and to contribute to lasting development.

Here again, it is a matter of building on the basis of existing tools, in particular on the European Investment Bank, which is renowned for its expertise and know-how: its annual funding capability must be raised to at least €200bn (as opposed to today’s figure of approximately €80bn) through the issue of bonds and through a boost both to its capital and to the guarantees put up by the member states.

A financial surge of this magnitude will also have an indirect cost for the member states, but that cost will be less than the direct benefits ensuing from investments, which generate an increase in immediate activity and important benefits in terms of endogenous growth in the medium term; it will also be less than the extremely negative economic and social impact that would be occasioned by ongoing indolence on Europe’s part.

Eurobonds and union bonds: thus equipped with tools offering real protection against speculative attacks and preparing the future of its member states and citizens, the EU will have issued a dual signal whose clarity and breadth appear to be the only factors capable of restoring confidence and dynamism in these difficult times.