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The Euro Crisis in the Focus of the GES: Eurobonds v. Fiscal Rules

October 1, 2013

Kiel Institute for the World Economy (IfW) in cooperation with Leibniz Information Centre for Economics (ZBW)

Eurobonds on the one side, national fiscal rules on the other: the members of the Global Economic Symposium (GES) in Kiel searched for possible solutions to the still lingering euro crisis. They mainly discussed the two most popular solution proposals.

Strongly advocating Eurobonds—declared taboo by German chancellor Angela Merkel—was the well-known US investor George Soros. According to the expert, one option would be to pay transfers. This would turn the eurozone into a transfer union, which nobody really wants. The alternative would be a guarantee given by the creditor states to the debtor states, i.e. Eurobonds. “Structural reforms in Southern Europe are not enough to solve the problem,” said Soros. “We need both: Eurobonds and structural reforms.”

However, Stefan Kooths from the forecasting center of the Kiel Institute for the World Economy (IfW) believes Eurobonds are “sending the wrong signal to the capital markets”. They could lead to gargantuan misallocations, because the interest would no longer reflect the credit risk. Kooths: “We need to take care not to fight the symptoms of the crisis with measures that plunged us into the crisis in the first place.”

Instead, the IfW expert argued the case for fiscal rules on a national level that should be implemented voluntarily. Fiscal rules would set a long-term debt ratio as a target figure, but allow additional expenditure in times of crisis to reflate the market. This policy would ensure that debts would be repaid in better times. Simultaneously, according to Kooths, banks would have to be stabilized with so-called solvency-convertible bonds.
System-relevant financial institutions should only be able to borrow money in form of these solvency-convertible bonds, which would automatically turn into shares the moment they fell below the minimum capital requirements. Thus, the shareholders and no longer the state would bear the risks.

OECD expert Eckhard Wurzel emphasized that Eurobonds would always be transfers, because the creditor states accept higher interest rates to enable lower interest rates for debtor states. This would undermine the strength of the capital markets, the dynamics of which are absolutely necessary. According to Wurzel, holistic structural reforms are necessary in the affected countries. This includes shutting down, restructuring or recapitalizing troubled banks. “But holistic does not merely mean the banks. That is why fiscal rules are necessary,” stated Wurzel, positioning himself between Soros and Kooths.

The Global Economic Symposium (GES) 2013 is being organized by the Kiel Institute for the World Economy (IfW) in cooperation with the German National Library of Economics – Leibniz Information Centre for Economics (ZBW).

Further information is available at http://www.global-economic-symposium.org and on the official GES Blog at blog.global-economic-symposium.org.

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