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A New Deal for Greece, and for Europe?

Though many in the financial markets now think a Greek default is inevitable, a new proposal which might avoid the mayhem of such a scenario is gaining considerable traction. It involves the conversion of a share of national debt to EU bonds. The decision on such a conversion need not be unanimous, since it could be by a voluntary process of enhanced co-operation as was the case when the euro itself was created. Germany might well want to retain its own bonds, and would be able to do so. Significantly, the European bond issues could be globally traded, and could then attract surpluses from the central banks of the emerging economies and from sovereign wealth funds. That could fund growth and cohesion within the Eurozone without fiscal transfers from Member States.

Of course there is no necessity for the conversion of a share of national debt to the EU to be traded. It could be held by the Union itself on its own account. A big advantage would then be that because it was not traded, this debt could be ring-fenced from rating agencies and therefore free from speculation. Its interest rate could then be decided by EU finance Ministers, not determined by rating agencies’ influence on the financial markets.

There is a precedent for this, the Roosevelt bond-financed New Deal in the 1930s. This was not financed or guaranteed by US Member States, and no fiscal transfers were demanded from them by the Federal Government, not did that Government buy out their debt. The same procedure could apply to the EU in issuing Eurobonds, since the European Investment Bank has issued its own bonds successfully for 50 years without either debt buy-outs or national guarantees or fiscal transfers.

Now of course the EU, unlike the US, does not have an EU fiscal policy to finance its bonds. But EU Member States who converted a share of their national debt to EU bonds could service it at lower and sustainable rates from their national tax revenues. It would not require fiscal transfers from others. And the EU itself has the advantage that even after the bank buy-outs last year its own debt level is just 1% of EU GDP, less than a tenth of the debt level afflicting the US when it issued the bonds financing the New Deal.

Bonds are not printing money. They are not deficit finance. They do not require fiscal transfers between States. Net Eurobond issues could be made by European Financial Stability Facility, and could be serviced not only from sources already quoted, but also from revenues from co-finance projects between the EFSF and the EIB. This could offer the best means to stabilise the euro and, arguably, deliver a New Deal for Europe.

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