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Eurobonds have returned to the forefront of the euro debate.  There are many varieties of eurobonds.  Some have been designed to mitigate the moral hazard risks that concern German officials (and many others).  The euro-nomics group (of which I am a member) have been advocating the concept of “European Safe Bonds” (ESBies) that does not involve joint and several liability, while other proposals have also been made.

Shahin Vallee recently made a presentation to the European Parliament comparing the main alternatives – the presentation file is here.

Jeremy Siegel points out in this FT article that a weakening in the external value of the euro can be important the recovery of the euro area;  Paul Krugman raises the objection that “… Europe as a whole, like America, remains a relatively closed economy. Its salvation must be mainly internal.”

Of course, trade with the rest of the world is a limited channel for the collective euro area.  However, it is important to appreciate that trade with the “rest of the world” is especially important for the peripheral countries, so that a substantial euro depreciation can be a contributory factor to the recovery process.  There is an interesting IMF paper that quantifies the role of external trade for the periphery countries – I will post a link once that paper goes online.

(The heterogeneous exposure of the periphery versus the core in relation to the external value of the euro was also much studied in relation to the very large euro depreciation against the dollar during 1999-2001. For instance, see this paper that I wrote with Patrick Honohan.)

Here.

Eamon Quinn has an interview with Peter Bacon on the WSJ website here.

It can be hard to get an intuitive sense of potential evolution of Ireland’s budgetary situation post-2015.   With this in mind, readers might be interested in seeing a hypothetical scenario for the period 2016-2020.   I hasten to add that this is neither a forecast nor a recommendation.  

The scenario begins with the Government’s projections out to 2015 as recently published in the Stability Programme Update.    To limit the number of assumptions, I focus on the actual budget balance rather than the structural budget balance.   The post-2015 scenario assumes: (1) an annual nominal GDP growth rate of 3.5 percent (which, for reference, compares to a forecast in the SPU of 4.5 percent nominal growth in 2015); (2) an average interest rate on outstanding debt of 4.9 percent for 2015-2020 (equal the projected interest rate for 2015 in the SPU); (3) total General Government  Revenue grows at the same rate as nominal GDP;  and (4) non-interest (or primary) General Government Expenditure grows at half the rate of nominal GDP.   Of course, a faster rate of primary expenditure growth would be possible for the same evolution of the budget balance with the tax system not fully indexed to nominal GDP. 

The evolution of the key aggregates (measured in millions of euro) are shown here; these aggregates as a share of GDP are shown here.   The debt to GDP ratio is shown here. 

Under this scenario, the actual deficit as a share of GDP would fall from the projected 2.8 percent of GDP in 2015 to -0.4 percent of GDP in 2020, a change of 3.2 percent points of GDP.   (The improvement in the underlying structural deficit should be broadly similar, starting from a projected 3.5 percent of GDP in 2015.   The rate of improvement is above the minimum required rate of improvement in the structural deficit of 0.5 percentage points of GDP per year along the adjustment path to structural balance.)   The debt to GDP ratio would be falling at a rate of 3.5 percentage points of GDP in 2019 and 4 percentage points in 2020, within the requirements of the one-twentieth rule, which comes into force after 2018.