DNB workshop on Macroeconomic Imbalances in the Euro Area 13/14 October 2011 Jeroen Hessel Senior Economist De Nederlandsche Bank Comments on Amtenbrink & De Haan

Outline paper eurobonds: legal & economic view Failure of current governance: enforceability Eurobonds to i) increase budgetary discipline and ii) avoid market speculation Feasibility under current European and national (German) law

Main comments: balance law & economics Enforceability is very important, but not the only problem. That is a simplification. If enforeability is the only problem, why far- reaching proposal to introduce eurobonds?

Enforceability (i): starting positions Rules were insufficiently enforced for several peripheral countries, but not for all of them

Enforceability (ii): deficit increase

Enforceability (iii): debt increase

Enforceability (iv): conclusion Enforceability should definitely increase But financial crisis was a very big shock Role of “forgotten” macro-imbalances Rules cannot foresee all future problems Budgetary problems never fully excluded

Eurobonds (i): what reason? If enforceability is key, why eurobonds? Why should we prevent market speculation?  Asian crisis, Latin American debt crisis Key reason: is a monetary union different?

Eurobonds (ii): EMU seems special

Eurobonds (iii): why is EMU special? Political effectiveness? Macro-imbalances and competitiveness Larger risk of contagion –Deeper financial integration –Many countries in a similar position De Grauwe (2011) inherent instability in EMU: –No exchange rate, monetary policy, lender of last resort

Eurobonds (iv): conclusion Main reason eurobonds:  Budgetary and macro-rules never prevent all future budgetary problems  EMU inherently unstable once this leads to doubt about debt-sustainability