As if the economic situation in Europe had not been bad enough of late, an even scarier picture has developed over the past few weeks. Greece is mired in political chaos and seems to be hurtling toward a euro exit. Meanwhile, new questions are emerging about the solvency of some major Spanish banks, and it now appears that much of the eurozone is experiencing what is being called a “slow-motion bank run.” Coupled with the fact that nearly 20 European Union summits have yet to find a solution to the 2-year-old crisis, it is no surprise that uncertainty about the common currency’s future is higher than ever.
All the bad news is reviving interest in what some policymakers believe is the zone’s nuclear option: the eurobond, or sovereign debt that is collectively backed by eurozone governments. But can issuing common debt really solve the crisis and save the euro?
Proponents of eurobonds believe they would help bring calm to sovereign bond markets, which have been punishing Spain and Italy and have forced Greece and Ireland to seek bailouts. If the entire eurozone issues joint bonds, proponents argue, bond investors will find lending to the entire region less risky, allowing less-creditworthy countries to borrow at cheaper rates. In short, countries with bad reputations will benefit from an even closer association to countries with sterling fiscal reputations, such as Germany, Finland and the Netherlands.