Jacob Kirkegaard of the Peterson Institute says look ahead for Eurobonds, but don't expect them in the near term

Europe's leaders and taxpayers are slowly warming to the idea of Eurobonds. Lately they have even been hailed as the way to solvency for the Eurozone's struggling periphery. We spoke with Jacob Kirkegaard, research fellow at the Peterson Institute for International Economics, on the viability of a Euro bond arrangement and whether it could be the solution to the current debt crisis.

“I'm encouraged by the fact that Eurobonds are being seriously discussed for the first time in a number of places, including Germany. In the long term, Eurobonds are a natural goal for the Euro area to pursue. At the same time, financial markets and observers need to be quite careful in not getting too far ahead of themselves, because introducing Eurobonds would mean changing fundamentally the way the European Union and the Euro area operate. Unlike, for instance, emergency interventions by the European Central Bank, the introduction of Eurobonds touches upon something very fundamental in any country: namely, the willingness of citizens to pay taxes. I think it's fair to say that one result of the crisis in the United States is that it has not shifted the willingness of Americans to pay taxes – and that's true in France, Germany, and elsewhere as well. What a Euro bond actually entails is that Germans, French, Beligian, and Dutch taxpayers might become liable for the debt of [other struggling members]. And that, historically, has proven to be unacceptable to taxpayers. It is essentially taxation without representation, because German taxpayers, for example, have no way of influencing how the Italian government is elected. So Eurobonds suffer from, shall we say, a lack of democratic legitimacy.

“A Euro bond in and of itself would not make Greece a fiscally solvent country, and it wouldn't help Italy that much. For this to be credible, you need to have a far more integrated fiscal policy for the Eurozone as a whole. Without having … an entity which would be able to overrule the individual fiscal policies of member states, this cannot work. This takes us back to something very fundamental about what it means to be sovereign, an independent country. Because if you all of a sudden can have your annual budget and your fiscal policies overruled by an outside policy, than a lot of people will start asking if they are a sovereign country anymore, and I think the obvious answer would be no. That's a realization that taxpayers are going to have to get adjusted to. This isn't something that you can do at 2am on a Sunday before the markets open in Asia – you can only do it as part of a longer term, very carefully managed political process.”

Crucially, though, the periphery nations have already lost their de factofiscal sovereignty, as they are forced to satisfy their lenders.

“Not only is the European Central Bank the most independent central bank in the world, it is more or less dictating the fiscal policies of a G7 country, in this case Italy. Quite clearly it is the case that the ECB, as a condition for its support of Spanish and Italian debt in the markets, demands that both governments proceed further on economic reforms and austerity. Which is another way of saying that you have unelected central bankers putting demands in front of democratically-elected governments. That is not necessarily a situation that I am perfectly comfortable with in the long run, but at the same it's quite clear that, because of the political constraints and the general weakness of governments across the Eurozone periphery, the ECB is really the only pan-European institution that is capable of acting to stem these crises in the short term. And the ECB has proven that it is quite willing to step into this leadership vacuum. And I think that's a very positive thing.”