Growth bonds a win-win for troubled eurozone

Stephany Griffith-Jones, Robert Akerlof and Marcus Miller

The eurozone is in serious trouble. Panic has grown as creditors search desperately for a safe haven, and corrosive contagion risks spreading unchecked. Rating agencies act pro-cyclically as usual, helping to deepen the crisis.

The outline of a deal by the 17 eurozone governments to be agreed this week is emerging. It would include fiscal commitments and a European Stability Mechanism; and the new agreement would not imply future debt reduction. This could be a basis for stopping the crisis.

The key missing element is restoring economic growth, as Martin Wolf underlines (“Merkozy failed to save the eurozone”, December 7). Excessive fiscal austerity, accompanied by lack of private confidence, risks euro recession – and may trigger future default.

There is an alternative: a win-win solution that would allow debtor countries to restore a minimum of growth and creditors not to face future default.

To give a breathing space for countries in trouble, a switch from conventional bonds to “growth bonds” would do the job – so interest payments are cut in times of low growth and increased as growth recovers. This does not imply overall debt reduction, but changes in the timing of debt servicing. So it is consistent with the package just agreed by Angela Merkel and Nicolas Sarkozy. By lowering debt servicing when growth is low, it would give fiscal space for debtor countries to grow; this would make their ability to service debt in the future far more likely. Therefore creditors would be more protected.

Keynes negotiated a similar clause in the US loan to the UK after the second world war. In the European case, this could be complemented by the offer of “stability bonds” to the creditors, to restore their confidence, with possibly some medium-term funding from the European Financial Stability Facility initially.

The people of Europe are looking for a grand bargain that avoids deepening the crisis and helps restore growth. Growth bonds could be a key part of the solution. Eurozone leaders should include it in their agreement.

This piece was originally published in The Financial Times.

4 Responses to “Growth bonds a win-win for troubled eurozone”

  1. Why are we still talking about growth as the remedy to the economic doldrums of illogical national ideologies whose excesses are funded by democracy destroying public debt? More debt is not the answer.

    The best policy is growth? Really? A quest for the most efficient route to infinity? On a finite planet? All debts paid on arrival? Do the math.

    The riddle is how to prosper in a fully educated world population experiencing gentle population decline. National energy shift from war to full-world education by the United States of America is a must do.

    The most educated human population ever is attempting to communicate what it means to live in the information-age on a full planet. Simple numeric growth is not part of the answer. Qualitative growth is the rational modern direction, it leads to living well on planet earth and eventually voyaging to the stars. Live well and prosper. Vivir bien.

  2. Per capita GDP growth is necessary Garrett. Otherwise your ‘gentle’ population decline will be anything but gentle. As the workers in Greece if the fiscal adjustment and lack of growth has been gentle on them!

  3. I meant ask the workers in Greece.

  4. The people of Greece have suffered the same government engineered transfer of wealth to the upper income brackets as the US, Spain, Italy, Ireland and all the rest. The young cannot afford a home even into their thirties. Corporations own the farmland and produce about 50% per acre as eco-agriculture. Corruption of economics to the purpose of noncompetitive and criminal elements is what has deprived those in need. Perversion of justice and destruction of democracy are paid for by the people for the benefit of what? GNP is not even a rational measure that means anything to a living entity. Quality of life can grow to infinity as economic activity declines with a declining fully educated population. As the population declines and environmental stresses are relieved then a positive feedback loop strengthens the standard of living via renewed natural bounty.