The Eurozone Prepares for Blue and Red Bonds

Germany and other Northern European members of the eurozone now face a binary decision, either allow the euro to fall apart with unknown and potentially devastating economic consequences, or agree to a eurobond regime ( “Europe’s Date With Destiny“). The stronger eurozone nations, namely Germany, must decide whether they are willing to make sacrifices in order to preserve the euro. There is no doubt that the concept and structure of the eurozone has been highly flawed since the day of its inception. However, there is no time to dwell over all of the mistakes of the past. It is time for Europe to decisively move forward, blue and red eurobonds appear to be the best idea on the table as politically unpalatable as they may be in Germany.

George Soros is quoted this morning in Germany’s Handelsblatt newspaper as saying “Germany and other countries with a AAA rating have to approve some sort of euro-bond regime. Otherwise, the euro will implode.” I believe that it is really just that simple, become fully integrated and share the burden of supporting the weaker members or dissolve the currency union. The concept of blue and red eurobonds makes a lot of sense: the blue bonds would be used to finance debt up to 60% of a country’s GDP, beyond the prescribed 60% threshold countries would be forced to issue red bonds which would be sold at a penalty rate thereby incentivizing countries to stay within the sustainable 60% debt-to-GDP limit. Questions abound as to whether heavily indebted eurozone members such as Greece and Italy would be able to afford to issue red bonds depending upon the interest rate markets would offer them. The situation remains highly unclear and the European wide vacation month of August certainly doesn’t offer much hope of clarity over the coming weeks.

Bloomberg- EU Heads for Eurobond Clash Over Fiscal UnionĀ 

WSJ- Euro-zone Leaders Need More Than Just Rhetoric

 

 

 

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