A proposal for a Euro area sovereign debt bond

Harold Chorney | November 29,2:31 p.m. I have just posted this comment on the FT's very interesting article by Wolfgang Munchau on the problem of European sovereign debt and the crises involving the PIGS. My comment is drawn from the work which I did in the 1980s and 1990s on Canadian debt problems and the limits of a federal structure combining with a central bank that had not sufficiently developed its federal qualities. what applied to Canada can easily be applied to Europe.

A federal structure always complicates monetary and fiscal policy. Both the U.S. and Canada operate a central bank and their own common currencies without resorting to the kind of stringent fiscal rules that binds Europe into a straight jacket that becomes a barrier to economic recovery after a slump. The 3 % deficit to GDP and 60% debt to GDP limits that apply in the euro area were always arbitrary measures without any scientific evidence to back them up as sound limits.

Historical evidence ought to have permitted more flexible limits, particularly in times of high unemployment.

The idea of a common euro sovereign debt bond is a very good idea. Each member country ought to have access to issuing such bonds in proportion to its GDP as a proportion of the Euro area GDP and its rate of unemployment relative to the average unemployment rate that prevails in the leading three Euro economies in terms of low unemployment.

So if a given country were 5 % of the euro area GDP and its unemployment rate several percentage points above the the average in the three leading economies with the lowest unemployment it would be entitled to issue sovereign euro debt bonds backed by the whole union and the ECB up to 5 % of the total euro area issue plus some agreed upon extra percentage to account for the higher unemployment.

The ECB should then be authorised to buy and sell this debt to ensure appropriate interest rates and avoid sovereign debt crises. With a structure like this or some variant of it the Euro area could then have a flexible, modern, yet fairly constrained system for managing debt and the business cycle.