Eurobonds debate continues to bubble up

Stock prices have skyrocketed in recent weeks, but the euro is actually falling sharply. However, the currency received a boost on Thursday evening when an agreement was reached on a corona support package. Eurobonds are not included. It's only a matter of time before that discussion resurfaces.

“If your house is on fire, I would like to help put out the fire, but I don't want to take over your mortgage,” comedian Arjen Lubach summed up Dutch sentiment about eurobonds. That one-liner is a bit short-sighted, but he does put his finger on a sensitive point. In the support package of € 540 billion that is now available, eurobonds are not necessary to extinguish the fire in southern Europe. However, it is not the first time that the idea of ​​joint bonds has been put forward. And not the last either.

Eurobonds were also discussed during the European debt crisis at the end of 2011. A eurobond is a loan that all European countries jointly guarantee. Countries can benefit from this that can issue new loans themselves on less favorable terms, because investors have less confidence in their ability to repay those loans. Like Greece in 2011. Or Italy now.

Borrow cheaply even without eurobonds
However, the Netherlands and other Northern European countries are fiercely opposed to these eurobonds. They fear that the profligacy of southern European countries will increase further if this tap of cheap money is turned on. Moreover, the borrowing costs for Italy are also not so high that eurobonds were inevitable. The interest on a government bond with a term of ten years is 1,65%. However, that is twice as much as six months ago.

Italy therefore loses more than € 1,5 billion a year if it now borrows an extra € 100 billion to keep the economy going. By way of comparison: if the Netherlands does this, the government will receive almost €70 million a year at current interest rates. The reason for this difference is that the Netherlands has neatly put the household book in order. Government debt as a percentage of GDP has fallen from 67% to less than 50% over the past six years. In Italy, the debt ratio has gradually increased to 138%.

playing with fire
For the time being, Italy can still manage on its own, but the Netherlands and other Northern European countries will probably face a difficult dilemma in the future. If you refuse eurobonds, you reduce the tax risks for yourself, but you do put pressure on the relationship with the whole of Southern Europe. You are robbing those countries of the resources to restart the stalled economy.

It's only a matter of time before the fire flares up elsewhere. The danger remains that the fire will one day become so fierce that the entire European Union will fall apart. Currency traders, meanwhile, are hard at work pricing in these kinds of risks. While stock prices soared, the euro lost ground against the dollar and pound in recent weeks. The modest rebound after Thursday evening's agreement did not erase the damage.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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