The Governor of the Bank of Greece, Yannis Stournaras, campaigned for Eurobonds long before they became fashionable, and is now turning to the toughest audience: the German government. In an interview with the American network Politico, Mr. Stournaras said the arguments are in his favor. Successive crises have resulted in a massive increase in EU countries’ public debt, limiting national budgets’ ability to address challenges from US trade tariffs, Russia’s war against Ukraine, and China’s threats to restrict exports of critical raw materials.
Mr. Stournaras emphasized that Eurobonds “cannot replace sound national fiscal frameworks.” However, he argued that no new rules or supervisory bodies are needed. He cited past experience as a successful precedent – specifically the €800 billion Recovery and Resilience Fund established after the pandemic. “A critical feature was that [Recovery and Resilience Fund] financing was linked to clearly defined European objectives, commitments with strict deadlines, and conditions requiring reform implementation. This architecture helped mitigate moral hazard while enhancing market credibility,” he noted.
Critics argue that moral hazard was not completely eliminated. Specifically, Giuseppe Conte’s government in Italy used NGEU funds to finance the “Superbonus” tax discount program, which derailed the country’s budget, forcing Conte’s successor, Giorgia Meloni, to take drastic corrective measures in recent years.
Politico on Stournaras: He has German and Dutch central banks on his side
Without common bonds to finance defense, green transition, and strategic investments, the EU economy cannot be competitive on the global stage. More importantly, Mr. Stournaras has the German and Dutch central banks on his side, as the 15-year dispute within the European Central Bank (ECB) over the need for a “common European, highly liquid, safe benchmark asset for the entire eurozone” – essentially, a Eurobond – has ended.
The ECB’s Governing Council issued a rallying call to EU leaders who met at an informal summit earlier this month. According to Mr. Stournaras, it’s time for governments to cooperate too.
“Today’s international environment is a wake-up call for European policymakers,” said the 69-year-old central banker. “The political momentum being created is certainly promising,” he added.
His optimism clashes with continued opposition from German Chancellor Friedrich Merz, who categorically rejected the idea at last week’s EU summit.
“I’m concerned” said Mr. Stournaras about Germany’s continued resistance. “But I would like to convince them,” he added.
Mr. Stournaras, who served as Greece’s finance minister from 2012 to 2014 before becoming Governor of the Bank of Greece, is a long-time supporter of this measure. In the ECB’s Governing Council, he had long been isolated, along with his Italian colleague. During the debt crisis peak, their position was often attributed to national interest, as Greece and Italy would benefit disproportionately from common borrowing.
“A few years ago, we were one, at most two Governing Council members supporting Eurobonds,” Mr. Stournaras recalled. “The other members thought: ‘You come from southern Europe, so it’s understandable.’ But now we’ve all realized how important Eurobonds are.” Now, even the German central bank, the de facto leader of skeptics, has changed its mind.
According to Mr. Stournaras, the fact that southern European countries, which were on the brink of bankruptcy a decade ago, are now performing well has contributed to changing views. Certainly, Berlin’s implicit subsidy to other European capitals through common borrowing has decreased significantly. The notorious “yield spreads” – the difference in borrowing costs between Greece and Italy versus Germany when issuing ten-year bonds – are now below 1 percentage point.
The investment climate
The strongest argument, however, is investors’ clear message that all of Europe would benefit from common debt issuance, Mr. Stournaras argued.
“If you talk to any major asset manager, whether in Europe or the US, and ask why most of Europe’s current account surplus is invested abroad, they’ll tell you the critical issue is the lack of sufficient safe assets,” he said. “It’s even more important than the rate of return.”
Common issuance should serve “clearly defined common European purposes,” Mr. Stournaras noted. “We have three common needs in Europe that can be jointly financed: defense, green transition, and innovation.”
Common borrowing advocates argue that a higher liquidity market for safe euro assets would enhance the region’s relative attractiveness to global capital, at a time when the reliability and attractiveness of US dollar assets are increasingly questioned. Competition with the dollar for global reserve currency status could ultimately – even gradually – reduce borrowing and investment costs for governments, businesses, and households.
The Greek central banker declined to estimate the exact amount of new debt needed to truly change Europe’s financial conditions, but noted there should be significant amounts of both short-term and long-term issuances. Short-term debt largely serves investors’ temporary capital placement, while long-term debt typically provides a benchmark price for private sector projects with long amortization periods, such as infrastructure projects.
The eurozone economy and inflation
Discussion about Europe’s financial architecture proves more exciting this year than short-term monetary policy prospects.
Mr. Stournaras noted that “the eurozone economy remains in good shape,” as inflation is projected to converge toward the ECB’s 2% target medium-term and economic activity proves resilient.
He acknowledged that risks to growth and inflation appear generally two-sided. Overall though, he said, there’s a “slightly greater” probability the ECB’s next move will be lowering interest rates rather than raising them.
In any case, he said, there’s no reason to wait anxiously: “Unless the sky falls on our heads, don’t expect exciting news from Frankfurt this year.”
