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"headline": "Can Eurobonds Rescue the Euro? Economists Revive Debt Plan",
"description": "Economists propose 'blue bonds' to boost the euro's appeal, but old divisions over joint debt persist. Is a stronger euro on the horizon, or will history repeat itself?",
"datePublished": "2025-06-25 07:33:00",
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CITY, June 25, 2025
Will ‘blue bonds’ break down barriers?
Eurobonds could offer investors a safe alternative to U.S. Treasuries.
- Economists propose Eurobonds to boost the euro’s attractiveness.
- The plan involves ‘blue bonds’ guaranteed by the EU.
- Past attempts at joint debt solutions have been contentious.
- Northern European countries have resisted due to moral hazard concerns.
- the EU’s debt rules, meant to address these concerns, are weakened.
The key to making the euro more appealing to global investors lies in large-scale joint borrowing, and the concept of Eurobonds, specifically ‘blue bonds’ guaranteed by the EU, offers a potential solution.
The Allure of Eurobonds
What if Europe could create a financial instrument so appealing it rivals U.S.treasuries? Imagine something with a steady return, zero credit risk, easily converted to cash, and perfect for parking funds. Currently, the absence of such an asset benefits gold more than the euro when the dollar weakens.
Did you know? since the start of the year, gold has benefited more than the euro from the dollar’s weakness.
Former International Monetary fund Chief Economist Olivier Blanchard and Ángel ubide, an economist at Citadel, co-authored a paper last month proposing a solution. The paper, which has garnered attention from senior figures at the European Central Bank (ECB), suggests dramatically increasing the size of the Eurobond market.
The Blue Bond Proposal
The proposal, initially conceived in 2010, aims to divide the government debt market. National government bonds up to 60 percent of gross domestic product would become ‘blue bonds,’ backed by the EU. Member countries would retain duty for debt exceeding this threshold, labeled ‘red bonds’.
In theory, this could provide a large, liquid pool of safe assets, giving global investors a genuine alternative to U.S. Treasuries.It would offer a steady return with no credit risk,serving as a long-term investment or easily accessible cash reserve.
A History of Discord
Joint debt as a tool to enhance Europe’s capital market has been a recurring debate.During the eurozone sovereign debt crisis, Italy and Spain advocated for Eurobonds to lower their borrowing costs.
Why has joint debt been such a contentious issue in the EU? The idea never materialized due to resistance from northern countries like Germany and the Netherlands. They feared being liable for the spending of other nations, a concept known as ‘moral hazard’.
Rules and Realities
the EU has attempted to mitigate moral hazard through rules limiting national borrowing. However, these rules were temporarily suspended during the pandemic and have been reinstated in a diluted, less enforceable form.
The Road Ahead: Overcoming Obstacles to Implementation
While the “blue bond” concept holds promise, its path to reality is paved with challenges. The core issue remains: bridging the divide between fiscally conservative nations and those with higher debt burdens. The success of Eurobonds hinges on more than just economic arguments. It requires a significant shift in political will and mutual trust among EU member states.
Even with political agreement, the implementation details are complex. Questions about bond yields, risk allocation, and the role of the European Central Bank (ECB) need thorough answers. Furthermore, the global economic climate will influence their success. Such as, rising interest rates could diminish the appeal of Eurobonds, especially compared to U.S. Treasuries.
Potential Benefits and Risks
“Blue bonds” offer the potential to stabilize the Eurozone economy. Thay can increase financial integration and create a safer asset market. A more liquid and attractive euro could also increase the euro’s global standing. However, risks include increased moral hazard and potential financial instability if not managed carefully.
Here’s a breakdown of the potential benefits and risks associated with Eurobonds:
- Benefits:
- Reduced borrowing costs for struggling nations.
- A deeper,more liquid European bond market.
- Increased international demand for euro-denominated assets.
- Enhanced financial stability during economic downturns.
- Risks:
- Moral hazard, where some nations take on more debt, counting on the EU.
- Challenges in agreeing on debt allocation and management.
- Potential for increased inflation across the Eurozone.
- Dependence on member states’ fiscal health.
The EU faces a critical juncture. Creating a dependable and liquid market for debt could propel the euro into a leading global currency, enhancing its economic and political standing. Failure to overcome the existing hurdles risks prolonged stagnation, leaving the euro vulnerable to economic shocks.
What are the main advantages of “blue bonds” for individual investors? Investors would benefit from safer, diversified investment options. They would have access to assets backed by the collective strength of the EU, offering lower credit risk.
What are the main disadvantages? Potential disadvantages include lower yields than riskier assets. Investors might face challenges,such as the reliance of the euro’s performance on EU policy and economic policies.
Ultimately, investors, policymakers, and European citizens hope to see a more stable and prosperous future. Could ‘blue bonds,’ in the long run, alter the course of European economic history? Only time will tell.
Frequently Asked Questions
Here are some frequently asked questions about Eurobonds:
What are “blue bonds,” and how do they differ from regular eurobonds?
“Blue bonds” are a specific type of Eurobond backed by the EU, designed to be safer. The EU would guarantee them to a specific percentage of each member state’s GDP. This distinction intends to provide a level of safety that conventional Eurobonds might lack.
Why is there resistance to Eurobonds, particularly from some Northern European countries?
Resistance stems from fears of moral hazard. Countries like Germany worry that they would be liable for the debts of fiscally irresponsible nations. Such concerns have historically hindered the adoption of joint debt solutions.
How would these “blue bonds” affect the average citizen in the Eurozone?
If accomplished, “blue bonds” could lead to more economic stability and possibly lower borrowing costs for member states. Ultimately, this will lead to lower interest rates and stronger financial stability, benefiting EU citizens. However, the risk is that if the system fails, taxpayers could be on the hook.
what is the role of the ECB in the Eurobond proposal?
The ECB’s involvement is crucial, as it signals how serious these bonds are. This also means they will likely be used to maintain the euro’s economic value.
Will “blue bonds” make the Eurozone more resilient to future financial crises? Experts say that issuing these bonds would increase the zone’s resilience. They would also help provide safer assets and improve financial integration.
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