The good way to do €-bonds is to realise that bonds are an interest rate instrument, not a fiscal instrument. So you decouple the bonds from the state-level fiscal policy, by giving every state a permanent, unlimited overdraft with the ECB, at no worse terms than the Frankfurt overnight rate. Then you issue ECB bonds rather than Treasury bonds.

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).

- Jake

Friends come and go. Enemies accumulate.