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Eurobonds Economics Presentation

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Sarah Wagner

on 9 June 2013

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Transcript of Eurobonds Economics Presentation

The issuing of Eurobonds -
a suitable way to save the Eurozone? Origins of the Crisis sovereign debt crisis
neglect of Convergence Criteria
lack of ECB insurance mechanism
inadequate economic policies List of Contents Recent Developments
Origins Crisis
Eurobonds: Definition & Functioning
Assessment: Pro & Cons
Discussion How to combat the crisis? What are Eurobonds?

debt investments issued by the 17 Eurozone countries
jointly guaranteed loans
highly controversial
different variations
Weizsäcker and Jacques Delpla (2011) : Blue bond proposal Blue Bond Proposal Blue bond Red bond “jointly and severally guaranteed” < 60 % GDP senior status: junior status: > 60 % GDP The Theory behind: The Mundell-Fleming Model Looking at examples of Spain and Germany Spain
Supposedly red bond (government debt > 60%)
The red bond system would have effects of expansionary monetary policy
Shift of the LM curve to the right -> higher Y (GDP) + lower i (interest rates) under fixed exchange rates + perfect capital mobility in the EU
But: increase in BoP deficit -> expansionary fiscal policy needed -> conflict with austerity measures Germany
Considered blue bond country (government debt < 60 %)
Low interest rates -> people and gov. would invest since very safe investment
Red bonds might be considered good investment Eurobonds a final assessment Pro- Arguments Con- Arguments Pro:
-Stabilize the EMU
-Redbond countries incentive to stick to 60% rule to become blue bond countries
-Even red bonds are a safe investment despite their high interest rate -> due to the contractual guarantee by the blue bond participants to back up the red bond participants’ loans Cons:
-Moral hazard -> red bond countries continue careless economic practices and blue bond countries would have to pay for it
-Looking at the Eurobonds criteria, it is striking that only countries below a debt ratio of 60% to their GDP are eligible of blue bonds
-Recent statistics show that in fact only five countries would fall under the blue bonds criteria for example Angela Merkel says :
"I don't see total debt liability as long as I live," after branding the idea of euro bonds "economically wrong and counterproductive” It is likely that countries such as Germany or the Netherlands would opt out of the proposal, which would pose a problem on the financing of the red bonds.
In theory, the blue bond proposal can be considered an efficient proposal to tackle the crisis but it is not realizable at the moment. Let's see what happens in the future... Thanks for your attention! Questions What do you think of Eurobonds ?
Do you think countries such as Germany/France could reduce their debt ratios in the near future to fall under the blue bond proposal ?
How to solve the conflict between the need for expansionary fiscal policy and austerity measures?
Is it too late for the issuing of Eurobonds ?
Full transcript