Although the joint issue of Eurobonds is a controversial idea, the argument put forward by Paul De Grauwe, Jean Pisani-Ferry, and many other leading economists and policymakers, is forceful: it would allow all members of the eurozone to find themselves in a much better equilibrium, significantly decreasing the interest burden on their budgets, and reduce a collective risk with which the whole eurozone is confronted, while taking on board concerns regarding moral hazard (De Grauwe, 2010; Pisani-Ferry, 2011). In a proposal put forward by Paul de Grauwe public debt servicing could be separated into two tiers. For the first tier, countries would be able to participate in the joint Eurobond issue, guaranteed by all EU Member States. This would cover public debt up to the Maastricht benchmark of 60 per cent of GDP. This tier of 'blue bonds' would thus receive triple-A rating. The second tier of 'red bond', anything above the 60 per cent threshold, would have to be issued in the national bond market. The 'red' tier would face a higher risk premium, which would create a powerful incentive for the government to reduce its debt levels. The 'blue' tier makes it easier to service the debt; the 'red' provides strong incentives for reducing the level of debt and thus reduces moral hazard and profligacy. Lower average interest rates help shield countries from being pushed into a bad equilibrium. Eurobonds up to 60 per cent of GDP would ensure that the European Stability Mechanism can remain within reasonable limits while providing liquidity support to larger vulnerable Member States. The European Parliament has already endorsed the idea of issuing Eurobonds. The introduction of Eurobonds will send a strong message to capital markets that the euro is indeed 'not negotiable!' as German Federal Chancellor Angela Merkel underlined at the 41st World Economic Forum Annual Meeting in January 2011.

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