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A Modest Proposal for the EuroZone - a Euro Treasury

  The sovereign debt crisis in the Eurozone continues to create instability in financial markets, political strife in Europe, and unnecessary interest expense for countries already under fiscal pressure. While there is no simple answer, the Eurozone will likely have to either disband or take action to transform itself into something which, on a financial basis at least, resembles the structures of the other leading "currency zones." - the dollar, the yen, and the pound.  
  In this regard, the Eurozone is unique in having a central bank which does not ordinarily purchase sovereign debt.  This has resulted in enormous spreads with respect to the debt of the weaker sovereigns. It also creates a situation in which debt in the Eurozone is disfavored in comparison with debt of sovereigns which may have similar fiscal problems to the weaker Euro countries but have central banks which can be counted on the clear auctions and therefore do not have any real potential for default risk. This puts the Eurozone at an enormous funding disadvantage vis a vis Japan, the United States and the UK. 
  To remedy this, The Euro countries should create a Euro Treasury which would issue bonds denominated in Euros.  The ECB's primary function would be to purchase the Euro Treasury bonds and thereby regulate interest rates.  The funds obtained by the Euro Treasury would be relent to sovereigns;  rules would be established under which the Euro Treasury would charge a small spread to the sovereigns and use the proceeds to fund administrative expenses and gradually build up reserves. Rules would be established under which sovereigns whose debt exceeded certain limits or whose borrowing from the Euro Treasury exceeded certain amounts would have to pay higher spreads on their borrowings from the Euro Treasury. The Euro Treasury bonds themselves would be marketable at relatively low yields because, like US Treasuries and Japanese government bonds, there would be no risk of an actual default.  Legally, the countries in the Eurozone would stand behind the Euro bonds, either on a proportional or on a joint and several liability basis. As a practical matter, such potential liability would be entirely theoretical because the ECB would always be in a position to purchase Euro Treasury bonds with newly created Euros if necessary. 
  The result would be lower sovereign borrowing costs throughout the EuroZone, a mechanism to discipline fiscally irresponsible countries through higher spreads, greater currency stability, and an important step toward closer union among the member states.           

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