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The VoxEU author is arguing that debtor nations -- Greece, et al -- will inevitably default within a few years, and would be much better off doing so by redefining their sovereign debt out of existence by rewriting their domestic laws.
Since, under a Eurobond system, they would not be at liberty to do so, any haircuts would have to be negotiated with creditors (Germany and France), who would be in a much more powerful position.
However, an EU (and a Eurozone) which sees member nations defaulting on each other is at a dead end in terms of integration, and would not seem compatible with progress towards fiscal and political union.
It seems to me that the optimal outcome involves both debt reduction and economic assistance to the debtor nations, which is only feasible within a deeper economic union which would enable co-ordinated industrial policy...
OK so am I dreaming? Is the Juncker bonds scheme (let's hope that name doesn't catch on) all about protecting the creditor nations and their banks?
It is rightly acknowledged that people of faith have no monopoly of virtue
- Queen Elizabeth II
If this is politically unpalatable, the same functional arrangement can be obtained by having the ECB procure at face value whatever bonds cannot be sold at the Frankfurt overnight rate (i.e. almost all of them), and then issue its own ECB bonds through open market operations. Functionally, the effects would be the same, but it would allow the sort of people who get aneurysms at the thought of unlimited overdrafts with the central bank to keep pretending that that's not what's happening.
Of course, the really smart way to do monetary policy is to not issue a fixed volume of bonds at all. Just fix the short term rate through the discount window, and issue bonds with a bid-ask spread around the policy rate (with widening spread as the term increases - in this view bonds are a service to the holder, in that they allow him to lock in an interest rate that the central bank could change arbitrarily and without notice; he should get to pay for that service, not the other way around).
Friends come and go. Enemies accumulate.
Of course, the really smart way to do monetary policy is to not issue a fixed volume of bonds at all.
Of course, they could always issue Greenbacks...
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