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Euro-bonds? Certainly Not a Good Idea Yet!

At the moment, the discussion whether the Euro-countries should emit Euro-bonds to finance the governments debts and redemption in the Euro-zone, is highly actual. Germany strongly opposes while France is an advocate.

South Europe is in general pro Euro-bonds because they had less discipline in the past concerning their yearly budget deficits, while the Northern countries showed more restraint. This resulted in higher interest rates for the Southern countries. With the introduction of Euro-bonds the Northern EU-countries will be confronted with higher interest rates.

Every country strives for their own benefit, so their position is determined by the interest rates they are going to pay when Euro-bonds are introduced. However if you look objectively at the consequences, when all the Euro-countries will be financed with one kind of Euro-bond, the budgets of the individual countries must be monitored and finance agreements must be enforced.

This will implicate that sovereign countries lose their in-dependency concerning budget and finance; a financial union is unavoidable. Strict budgetary and financial control for the Euro-countries must be enforced and therefore individual countries, in principle, will lose control over finance and budget.

On the other hand one argues that if you do not introduce Euro-bonds and stringent government finance rules the Euro-crisis will reappear later; history will repeat itself because financing the deficit at the cost of other countries is an easy opportunistic way out for (some) politicians.

This scenario is however not necessarily true; the Euro-crisis could arise only because the financial markets were not efficient. The over finance of countries like Greece and Italy only has been possible because the financial market lacked efficiency.

The shortcomings of the financial system, why the Euro-crisis could develop, are:

1. The financial markets had the opinion, which appeared to be correct, that over finance of countries in the Euro-zone would be backed-up by other countries, which is precisely what is happening!
2. Banks are allowed to leverage their assets; borrow money on securities in possession. The amount they can borrow is dependent on the risk of the security. Government securities are considered, in the present banking system, without risk! So when banks buy government securities these investments put hardly any restraint on the banks ability to lend. Banks are allowed to value government bonds at the nominal value. It is therefore very attractive for banks to buy government bonds of financially weak countries within the Euro-zone; they receive higher interest rates but there are no additional restraints. To boost profit and bonus it is opportune for banks to buy a lot of high return government bonds.
3. Rating agencies determine the risk of securities! When it is profitable for these agencies to give false high ratings, because their profits are then boosted, these ratings become (highly) unreliable and increases, undetected for regulating authorities, the risks of financial institutions.

When the European Union makes it clear that every individual country is solely responsible for their debt, puts restraints on the financial stimulation for banks to over-finance weak countries and furthermore, when the EU provides the market with accurate financial/budgetary information of the individual Euro-zone countries, the financial market is be able to finance individual countries efficiently according to risk.

Then, like before the introduction of the Euro, every country is responsible for its own finance. There is no principal difference between Europe with the Euro and a vast country with one currency and different states. Of course there will be regions that are rural or urban, rich or poor, dry or wet. That however doesn't implicate these states cannot be one nation.

However Europe must expect and accept that geographical and cultural differences can result in substantial difference in wealth.