MEPs call for Eurobonds to be used

MEPs have called Eurobonds a source of stability for the Eurozone in the medium term in a resolution approved on Wednesday. The resolution also welcomes the European Commission's green paper on Eurobonds, which was published last year in response to several Eurozone countries having to pay high interest rates to borrow on the international markets. But what are these bonds actually all about?

A bond is a debt contract, under which an investor agrees to loan money to a company or a government in exchange for a predetermined interest rate. If the investor believes there is a risk that the borrower could have difficulties paying back the loan, they will charge a higher interest rate on the loan.

                                               

Indebted euro zone countries with fragile economies have to pay considerably higher interest rates meaning it is more expensive to borrow money, which makes it harder to finance the state budget and repay debts.

Last year the Commission presented a green paper looking at the possibility of introducing shared eurobonds or stability bonds from euro zone members. Commonly issued eurobonds would mean a pooling of sovereign issuance among member states and the sharing of associated revenue flows and debt servicing costs. The introduction of eurobonds is expected to:

• create new means through which struggling member states can finance debt, by offering safe investment opportunities for lenders and investors

• allow indebted members to benefit from stronger credit worthiness

• lower average borrowing costs

• lead to a significant deepening of Economic and Monetary Union and make the euro zone system more resilient as a whole by reinforcing financial stability

• strengthen the position of the euro as an international reserve currency

However a group of top rated euro zone economies (Germany, the Netherlands and Finland) , which currently benefit from very low interest rates on state bonds due to their safe haven status, fear that the introduction of eurobonds would mean higher borrowing costs. They argue that the main structural problem to be tackled in the short term is to ensure balanced state budgets throughout the euro zone.

MEPs: Stronger fiscal discipline a precondition for eurobonds

The Economics Committee welcomes the plan to introduce eurobonds, but emphasises that the final proposal must make the system attractive for triple A-countries as well as heavily indebted ones and introduce enforceable debt reduction systems for euro zone members. It also says that stronger fiscal coordination and better economic governance is a "necessary precondition" for common issuance of eurobonds.