Europeans are taking Alexander Hamilton's name in vain.
Editorial The Wall Street Journal, May, 25, 2012
European stock markets have been tumbling all week over fears of the damage a Greek exit from the euro zone could do to the single currency and even the European Union. Yet through it all, Germany's borrowing costs keep going down—so much so that on Wednesday Berlin sold two-year bonds that pay no interest. That's compared to Italy's two-years yielding 3.5%, Spain's 4% and Portugal's a whopping 9%.
So it's little wonder that the idea of issuing eurobonds is back. Some are even calling it an idea worthy of Alexander Hamilton, if you can believe it.
The argument is this: While some euro-zone countries have huge fiscal problems that have strained their borrowing costs, the picture for the euro zone in aggregate is much better. The euro zone's total budget deficit was 4.1% of GDP in 2011, while total government debt equaled 87.2% of GDP. If the euro zone were a country, those numbers would compare favorably to the U.S., where the deficit was 8.7% of GDP last year and total debt has already hit 100% of GDP.
Yet the U.S. can still borrow at rates much closer to Germany's than Italy's. So the idea is to pool the borrowing, lower the rates, and everyone comes out a winner.
Here's where Hamilton comes in. In 1790, the first Treasury Secretary proposed, as part of his First Report on the Public Credit, that the nascent federal government assume the war debts of the original 13 colonies. Congress narrowly approved the idea, thereby saving the states from almost certain insolvency and securing America's good name in international credit markets.
The eurocracy wants Europe to do the same and make all of its fiscal troubles go away. But there are some basic differences between the U.S. in the Age of Hamilton and the EU in the Age of Hollande.
For starters, George Washington's administration did not assume states'future debts—only those that were a legacy of funding the war for America's independence. Hamilton realized that the states had to be responsible for their own future fiscal policies. Some U.S. states went on to overborrow—and fall into bankruptcy—in the 19th century, and on current trajectory insolvency is possible for some of them again. The French and Italians want eurobonds precisely to put Germany on the hook for their future spending.
A second difference is that Hamilton's assumption plan was based on the conviction that America's war of independence was a burden for the entire country, one whose costs deserved to be shared equally. By contrast, the debts of Greece, Spain and Italy were incurred domestically to support domestic spending, not as a sacrifice in the name of ever-closer union.
That difference may be as much moral as economic, but it also helps explain why Germany's Angela Merkel remains adamant in her opposition to the proposal. How many times can the Chancellor, already politically weakened by recent state elections, ask Germans to pay for the indulgence of others?
But perhaps the most decisive difference is that the U.S. has a strong central fiscal authority with the capacity to levy taxes directly and print its own currency. This is what underpins investor confidence that they will be paid back what they lend. Europe has no equivalent fiscal authority. Until everyone in the euro zone turns taxing and spending powers over to Brussels (which is to say not in our lifetimes), none is in prospect.
This makes eurobonds much like the euro itself—a bond without a country, or a single treasury, to back it; a bond subject to the willingness and ability of the nations involved to meet their commitments to support that debt. Worst of all, turning the currency union into a debt union would ease the bond-market pressure that is the main force driving Europe's spendthrift nations toward fiscal and labor-market reform.
In other words, it's at least as likely that a debt union would drag Germany's borrowing costs up as it would bring Italy's down—a possibility of which the Germans are acutely aware. Investors lend to governments because that's where the money is, to borrow a phrase. A debt union without a central fisc is another euro-mirage.
A version of this article appeared May 25, 2012, on page A12 in the U.S. edition of The Wall Street Journal, with the headline: Deus ex Eurobonds.
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