Anthony de Jasay

Thinking About the Euro-bond

Anthony de Jasay*
The intensive care of the 3.0 per cent limit...
The Eurozone, whose basic operating rule is that the member states' budget deficit should be limited to an annual average of 3.0% of GDP, seems to be in intensive care. Some observers believe that it is now in mortal danger, because its basic operating rule is in contradiction with elementary economics, and this contradiction becomes very awkward at a time when the politics of the area are flirting with unorthodox populism and does not tolerate unpleasant fiscal and monetary policies. Other observers, notably the Brussels bureaucracy of Eurocrats and many economists, notably the followers of Joseph Stiglitz, believe on the contrary that the moment is now for "more Europe" with strong new institutions. They want to replace the individual behaviour of each euro-land state with what they call "mutualisation," and introduce a new institution, the euro-bond, which would disallow individual euro-land states to borrow without regard for the 3% budget deficit limit. The popular version of the euro-bond is that you can borrow on it and eventual repayment is not to be discussed. If it were not bad manners to discuss it, they would say that the repayment of the bonds would naturally fall on Germany. Georges Clemenceau, who almost single-handedly directed the peace after World War I, used as his argument that "the Germans will pay." They indeed were made to pay and it is best never to forget how tragically this ended. It would of course be both immoral and politically stupid to make the Germans pay, even if they let themselves be abused.

If something radical is to be attempted to revive the euro-zone, it has to be much more original. The euro-zone is now in a precarious state and requires a severe diagnosis. Two of its weakness stand out. One is that before the euro was introduced, it was sold to the public as an instrument able to grow the economy by an appreciable number, by virtue of the member states abandoning their various national currencies and adopting a uniform money. After nearly two decades of the euro, this promise is less and less likely to be fulfilled. (Also we cannot really say what the growth rate of countries would have been if they had not adopted a common currency.) The other weakness is that during this period, most of the member states have increased their cumulative national debt to at least the level beyond which the deficit rule is not supposed to reach, so that these countries are to live by the much hated "austerity" which their public resents and which is not even a recipe for a sensible policy.

There are four considerations that should enter into any programme for strengthening the Euro.

The rule of law
"Above all, the rule of law must be part of the fundamental reforms. It is worth preserving in our civilisation and any serious breach of it would do more damage than what the euro itself may be worth."

There are instruments like "mutualisation" and above all the much-desired "euro-bond" which can only be used to make more fundamental reforms more easily adopted. Above all, the rule of law must be part of the fundamental reforms. It is worth preserving in our civilisation and any serious breach of it would do more damage than what the euro itself may be worth. There are reforms, some of them proposed by reputable economists, by which one country finds itself liable for the debts run up by another country (for this is what "mutualisation" amounts to), and it is also a delicate question of how euro-bonds would be distributed between creditors and debtors. The rule of law requires that any unrequired transfers would always be a matter of consent.


The Maastricht Treaty has a principle rule for countries to direct their budget deficits so as to have them worked out to 3% of GDP or less. This is an open invitation for countries to run up their deficit to the magic 3% or more, because governments are in competition with their opposition, and they have often the advantage over the opposition if they can run up their expenditures to the maximum they are allowed. Moreover, within their expenditures they have an advantage to have more spent on consumption and less on investment, if it is the case, as it often is, that their electorate appreciates consumption today over investment whose fruits they will only enjoy after a number of years. In one word, the euro-rule of government behaviour is tailor-made for pushing the level of national debt as high as possible and keeping it growing every year by the famous 3%, or even more, of national income. Combine this with the rule of elective democracy, and the national debt will normally be used for financing consumption at the expense of investment. This, in an indirect way, has the wealth of the nation held down because investment by the government is smaller than it would be if the electorate did not press for more consumption.

It is dogs' tails in the kennel

The United States is a federation and it is fair to say that the dollar is a consequence of this. When the euro was proposed by the Eurocrats, the causation was the opposite. The euro was to be the cause, and European structure was to be the consequence. It was part of this proposal, although it was not made explicit, that if a group of European states adopted a common currency, they will find its correct management impossible as long as they retain sovereignty, and will sooner or later have to proceed to a federal structure with the main taxes and expenditures decided, collected, and spent in a European federation. The euro was in fact adopted by most of the states of Europe but the supposed consequence, i.e., that they would unite themselves, was received with almost uniform refusal. The member states found that sovereignty over their own taxes and expenditures was far too precious to abandon, and let the euro just be managed in the least painful manner possible. The least possible manner has turned out to be the 3% limit of each country's budget deficit, enforced by a penalty which in the event was simply never enforced.

The 3% deficit limit compared to the overall body of the economy cannot be taken seriously. It reminds one of a kennel with two dozen dogs of the most varied races, from a big greyhound to a small terrier, whose good behaviour and development are inspected and supposedly controlled by inspecting their tails. The 3% budget limit is to economics as the tail of the dog is to dogs' breeding.

The role of the euro-bond

For more on these topics, see "For an Ever Closer Union" by Anthony de Jasay, Library of Economics and Liberty, October 3, 2016. See also the EconTalk podcast episode Crafts, Garicano, and Zingales on the Economic Future of Europe, and Bonds and Fiscal Sustainability in the Concise Encyclopedia of Economics.

Controlling the euro by the tails of the dogs is precarious and will not do, and "making the Germans pay" will not do either. There are fairly simple elements by which a system incorporating the euro might be construed. There could be a managing agent owned by the participating governments, having modest capital, which would trade sovereign bonds, euro-bonds, and private sector bonds in such a way that the three types of bonds are brought into market equilibrium by their yields. Governments would divide their expenditures in a carefully controlled manner supervised by the managing agent, so that the public would easily distinguish consumption from investment. Government would be obliged to take a certain percentage of their consumption to redeem the outstanding sovereign bonds so that the national debt would decrease as consumption expenditure was continued. Governments would be authorised by the managing agent to issue government bonds to cover a sum no greater than their investment expenditure. These bonds would bear an interest rate comparable to market rates, eventually with an interest-free period so that interest would start to be levied once the investments financed by the bonds started to yield. The excess of the outstanding euro-bonds over the redemption of the sovereign bonds of the various nations would have to correspond to the market demand by the private sector (insurance companies, pension funds, nonfinancial debts, and the savings of private individuals), so that the supply of euro-bonds would tend to equilibrium with the demand for the private sector and the redemption of sovereign debt.

The construction would be hoped to compensate the electorate of democratic governments for stingy government expenditure by a substantially larger public investment, as national sovereign bonds are redeemed and euro-bonds issued in a larger quantity. Another intention would be to have government investment to contribute to the rate of growth of the economy. In the long run, euro-bonds would gradually replace the outstanding amount of the sovereign bonds of the various national governments.


The euro will be an intriguing subject for future economic historians. If it has survived in the future, what will they determine had gone right? If it has dissolved, what had gone wrong? From our present perspective, the questions are a little different. The euro exists, and we may have a presumption in favour of what exists, except when it is manifestly wrong. It may therefore be worthwhile to save what exists and to reform it, if the present can be saved from self-destruction. The present article seeks to make a point or two in that direction.

* Anthony de Jasay is an Anglo-Hungarian economist living in France. He is the author, a.o., of The State as well as other books, including Social Contract, Free Ride, Political Philosophy, Clearly, Political Economy, Concisely, Economic Sense and Nonsense, Helmut Kliemt, ed., and Justice and Its Surroundings. His books may be purchased through the Liberty Fund Book Catalog.

The State is also available online on this website.

For more articles by Anthony de Jasay, see the Archive.
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