THE EU SOVEREIGN DEBT CRISIS AND „EUROPEAN BONDS“ OPTION

Abstract

After the financial crisis economies with existing deficits usually are in danger to go to default due to uncontrolled borrowing paces. All the members of the European monetary union have violated treaty limits on allowable budget deficits – some of the members have four times larger deficit. Such a development clearly suggests that some countries in European Union might become insolvent, since their net external debt is really large measure to the size of their economies. After financial crisis economies back to the recovery after a period of  3 or 4 years. Therefore economies are shrinking or growing rate is very slight. Due to these processes it is really big challenge to bring these deficits back to satisfactory level. Governments then have to go to the market and ask for additional debt to cover its deficit. These countries, if not aided, will possibly default and will be forced to restructure their debt. This argument is the reason why European Commission and prime ministers of European Union make a lot of play on discussions about present and future sovereign debt issues, not only regarding the certain countries, but the entire EU. The Italian finance minister Giulio Tremonti and Luxembourg's Prime Minister Jean-Claude Juncker, in an article which appeared in the Financial Times on 5 December, launched the proposal to issue the “European bonds”. In this paper authors follow this idea and appeal to obvious arguments showing, that “European bonds” would be great cooperation to control Euro zone debt. Also authors consider “European bonds” as a tool to solve EU debt crisis and ensure future financial stability of all EU countries.

The “European bonds” idea is not new. The first one goes back to Jacques Delors in the 1980s. Jacques Delors proposed the issue similar bonds  in addition to European Investment Bank loans to finance infrastructure investments, so the initial idea was intended to provide a new debt instrument for financing pan-European infrastructures, but recently “European bonds” idea became the possible measure to overcome present sovereign debt problems.

In the first part authors analyze occasions of sovereign debt crisis - unbalanced sovereign budgets, irrational social and public spending, too high trust of creditors, etc. The second part of the paper is devoted to theoretical assumptions of debt structures development and “debt dilution” phenomenon. Long recognized as a problem in corporate debt, dilution seems to have recently become a significant problem in sovereign debt markets. Debt dilution has undesirable consequences for both debt structures and the amounts and terms at which sovereigns borrow. In the third and fourth part various aspects of “European bonds” are being analyzed. Also the negative and positive consequences are analyzed if “European bonds” proposal would be implemented.  Also government deficit, government consolidated gross debt and Long term government bond yields statistics are presented to append the paper findings.

DOI: http://dx.doi.org/10.5755/j01.eis.0.5.1087