Germany and Eurobonds

George Soros says that Germany must either support Eurobonds or she must leave the euro.

Given this choice, Germany should leave the eurozone.  They’ll be far better off.

Soros began his op-ed with a false premise:

The euro crisis has already transformed the European Union from a voluntary association of equal states into a creditor-debtor relationship from which there is no easy escape.

The nations of Europe were never equal states, though, and a common currency cannot make them so.  All a common currency can do is facilitate trade—which is no mean thing, but equality it cannot create.  Proceeding from a false premise, the rest of his argument has no meaning, but let’s look at some of it, anyway.

Soros thought he had identified the problem underlying the current crisis thusly [emphasis added, italics in the original]:

By creating an independent central bank, member countries have become indebted in a currency that they do not control.   At first both the authorities and market participants treated all government bonds as if they were riskless, creating a perverse incentive for banks to load up on the weaker bonds.  When the Greek crisis raised the specter of default….  [D]ebtors were treated as if they were solely responsible for their misfortunes and the structural defects of the euro remained uncorrected.

However, these questions are separate from each other.  The one is true, regardless of Soros’ negative attitude.  No one stuck a gun in any national ear and forced that country’s government into their profligate, irresponsible spending and borrowing ways, no more than, say US states—or States under the Articles of Confederation—have been forced to borrow excessively in currencies [sic] which they do not and did not control.

Moreover, the common currency did, indeed, create those perverse incentives, but it did so by pretending that the member countries actually were the equals of each other—hence the perversity: those nations were not, and are not, equal in the relevant context, in the context of their credit worthiness.  Given that inequality, the interest rates demanded by the market were widely divergent, and of course market participants loaded up on the higher-return debt: the common currency created an unsatisfiable belief that repayment by all nations actually was equally assured.

Separately, the structural defects do, indeed, remain uncorrected.

Soros then offered his solution:

If countries that abide by the EU’s new Fiscal Compact were allowed but not required to convert their entire stock of government debt into eurobonds, the positive impact would be little short of miraculous.  The danger of default would disappear, as would risk premiums.  Banks’ balance sheets would receive an immediate boost as would the heavily indebted countries’ budgets.  …  Most of the seemingly intractable problems would vanish into thin air.

No.  A miraculous disaster is all that would result.  There is no moral—or economic—reason for the taxpayers of one country to be required to indemnify the citizens of another country for that second country’s spendthrift ways—ways that those citizens actively support with their elections.  Instead, lacking incentive to correct their behavior, they simply would drag down the responsible with them.

Also, a mandatory eurobond does nothing more than substitute a common debt instrument for a common currency, with the same built-in failure: it will not make equals out of unequal nations.

Soros went on:

If a member country ran up additional debts [in his eurobond régime] it could borrow only in its own name.


A tighter Fiscal Compact would practically eliminate the risk of default.

The borrowing restriction, though, is supposedly the present case—and certain nations still overborrowed.  His view of the Fiscal Compact shows a breathtaking misunderstanding by so successful investor.  If there’s no risk of default, there’s no incentive to behave responsibly, no danger to borrowing excessively, at least to the borrowing nation.

He also got into a German departure from the euro.

If a referendum were held today, the supporters of a German exit would win hands down.   But…[t]hey would discover that the cost to Germany of authorizing eurobonds has been greatly exaggerated, and the cost of leaving the euro understated.

No.  The cost of participating in eurobonds has not at all been exaggerated: there is no reason at all for German taxpayers to be held liable for another nation’s fiscal irresponsibility when those German taxpayers, in Soros’ words, do not control that nation’s behavior.  The existence of such a risk means that the cost has not at all been exaggerated.

Germany would be the better off for departing the euro, if its only alternative is to accept responsibility for a share of eurobonds that are used to bail out the irresponsible without the structural changes—at a national level—that are necessary to correct the nation’s problems.  Especially since those necessary structural changes both are necessary in their own right, and their execution would eliminate the need for a common debt instrument.

In the end, as described in the first link above, the eurozone is itself founded on a false premise, and it would better function as a collection of smaller comities that honored the diversity of Europe.

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