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Friday, August 19, 2011

Eurobonds: The Solution to the E.U.’s Debt Crisis?

One possible solution to the E.U.’s debt crisis may be debt issued by an E.U. government agency and vouched for by all 17 state governments that use the euro currency. According to the Wall Street Journal, “Such euro bonds would dispel concerns Italy or Spain might not be able to get the financing they need, as it would be provided centrally.” Of course there is the downside of moral hazard: states facing crushing debt-loads could rely on the wealthier states to guarantee additional debt. Because the “fiscally imprudent” state governments “could borrow freely at low cost, there would be little incentive to stop.” The wealthier states in turn would be in the position of guaranteeing debt that they do not control.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.