Rabobank Group

18-3-2009 | Press Releases

Government deficits of the eurozone member states should be financed centrally from now on. This is the view that Rabobank Chief Economist Wim Boonstra puts forward in a study published today that calls for strengthening the euro. The related background to this proposal is the fact that the euro has currently come under pressure. The government finances of a number of member states have deteriorated considerably due to the financial crisis. The differences between interest rates within the eurozone have widened sharply in reaction to this development. Boonstra ascertains that the financial markets within the eurozone are a source of instability. These markets failed to make an adequate distinction between the government debt of the different member states for many years. In contrast, they are now going too far in the opposite direction. Parties within the market are already openly speculating on the collapse of the European common currency. This would have disastrous repercussions for Europe.

In his study, Boonstra proposes financing all government debt within the eurozone centrally via a common agency from now on. This agency would function as a conduit for financial resources and would also need to charge the member states a mark-up or mark-down depending on the quality of the member states’ government finances. Rather than relying on the financial markets’ discipline, which has proven to be ineffective in practice, this agency, which Boonstra is calling the EMU fund, would exert a disciplinary effect. The advantages of this approach are myriad. Average interest rates would decrease due to the huge liquidity ensuing from the new market for eurobonds. Countries would be more swiftly ‘rewarded’ or ‘punished’ for either good or poor budget policy. It would also no longer be possible to speculate on the collapse of the euro. 
Boonstra emphasises in his study that his proposal will not lead to the creation of a pan-European budget. He notes that there is neither the political will nor necessity for this. According to this proposal, countries would be required to give up only a fractional amount of autonomy in exchange for a stronger euro and lower average financing costs. 

The proposed approach could be introduced in practice without adopting far-reaching treaty amendments. Providing that a few of the strongest member states take the lead, a range of measures could be implemented within an extremely short time frame. The advantages of this system will then become so evident that the weaker member states will quickly want to come aboard. They could then be permitted to join the group, but only according to the terms and conditions set by the leaders.