Hi #econtwitter! Here a 10-tweet thread on #Eurobonds. It seems (I hope) that the Corona virus finally has tilted the scales in favor of the introduction of a Eurobond (or #Coronabond). A start to a permanent common safe asset? (1/n)
The Euro is unique in many ways, among which as a currency without a safe asset that spans the currency area. For a long time there have been economist arguing for the joined issuance of a Eurobond. Why? (2/n)
In crisis times (like today), a Eurobond would provide cheap market access to countries most heavily hit, also breaking the sovereign-bank doom loop in banking crises, and stopping capital flight to safety. (3/n)
Read: Italy could support its economy and fund emergency healthcare costs by using its share of the additional Eurobond revenues without facing high interest rates. This of course benefits the whole euro area. (4/n)
These benefits were there after the Great Recession, but so far (core) politicians have blocked all proposals, even when cleverly designed to minimise risk sharing. Mind you, any country has a share of tax revenues to allocate to the Eurobond that can be considered safe! (5/n)
One explanation is that in “normal” times, there seems to be no reason for a Eurobond… but there is! The euro resulted in a revaluation for the core and a devaluation for the periphery, redistributing any fiscal burden in favor of the core. (6/n)
This exchange rate effect makes it harder for periphery countries to produce their own safe assets, resulting in a lack of safe assets. A Eurobond would restore some of the balance. In addition, in my JMP I (will) show potentially large benefits in "normal" times. (7/n)
Eurobonds support banks in their role as providers of safety. A larger supply of safe assets result in more efficient safety provision and thus more investment in the real economy, a benefit for all countries. Even if small, this benefit compounds during years without crisis(8/n)
Yes, the design of Eurobonds matters. E.g it matters for the distribution of costs to tax payers. In my JMP I show that the design could compensate for a negative externality of capital flows, both from core to periphery in normal times and opposite flows in crisis times... (9/n)
without increasing tax in the core! Yes, a Eurobond potentially involves risk sharing. It can be designed to minimize this, but I for one am willing to share risks and fiscal costs with other Europeans, disadvantaged from the start, to keep the enormous benefits of the euro(10/n)
