The List

The Name Is Bond. Eurobond.

Europe's debt crisis gets a new potential hero, with Germany once again cast in the role of villain.

The word on the lips of many of the 17 leaders of the eurozone following this week's meeting of heads of state -- the 18th summit, for those who are counting -- is Eurobonds. The ideas behind them, though, are out of sync. "Europe can have Eurobonds soon," Italian Prime Minister Mario Monti insisted. "[The] taboo surrounding Eurobonds has been lifted," a European Commission official declared. Not so fast, German Central Bank chief Jens Weidmann chimed in, "It is an illusion to think Eurobonds will solve the current crisis."

So, what exactly is a Eurobond? Briefly put, it is a tool intended to collectivize debt across all eurozone countries. Right now, to raise funds, eurozone members have only one option: selling national bonds. The market determines the value of these bonds based on each country's fiscal and economic health. The problem is that as some European countries were roiled by a national asset bubble (Ireland) or experienced a decade of lackluster economic growth while racking up unsustainable levels of debt (Greece and Portugal), they became unable to tap private markets, and their existing debt became prohibitively expensive to pay back. To service their debt, these countries had to receive funds from the International Monetary Fund, the European Central Bank, and the European Commission. But with the crisis deepening and spreading to Italy and Spain, it looks like another solution is required: the Eurobond.

In theory, Eurobonds would allow debt-ridden countries like Greece to borrow at more affordable interest rates. For instance, according to the Guardian newspaper, if Eurobonds were adopted, Portugal would see its annual debt repayments fall by as much as $18 billion or 9 percent of GDP. Other struggling European countries, such as Italy, Spain, or even France, would likely see similar savings.

But even as Eurobonds relieved the crisis in the periphery, they would increase the borrowing costs of countries in better financial health. For example, according to the same article, if Eurobonds were introduced, Germany's borrowing costs would rise above the current eurozone average, costing Berlin an extra $62 billion, or 2 percent of GDP, per year to service its debt.

What prevents the wealthier countries, or more specifically Germany, from getting to yes on Eurobonds? In a nutshell, moral hazard: If Greece, Ireland, Italy, Portugal, and Spain were allowed to borrow at lower rates, the market pressure to implement deep and difficult structural reforms would disappear.

The path to European redemption, according to German leaders and the European Central Bank, must only come through difficult reforms and fiscal discipline, not the same sort of low-cost borrowing that got the periphery countries into their current difficulties. This moral hazard argument was precisely why Germany demanded a fiscal compact treaty (which maintains strict fiscal debt and deficit limits) in December in return for additional bailout funds.

There are also legal arguments against Eurobonds. At present, EU treaties expressly forbid joint debt liabilities within the monetary union. The introduction of Eurobonds would require several treaty amendments and very likely ratification by eurozone members. Eurobonds are likely also unconstitutional in Germany, and would require at least 10 legal changes, according to the Guardian. Sorting out the legal and political challenges could take years.

The Eurobonds debate also extends to the form and scope of these bonds. Since 2000, there have been at least six different proposals on how to structure a Eurobond. To simplify, we place the Eurobond discussion into three separate categories:

Door No. 1 is the maximalist definition of Eurobonds, requiring that all 17 eurozone countries completely mutualize their current stock of debt and issue common bonds. In other words, they would ensure joint guarantees, meaning that each member state not only pays for itself but also the obligations of any other country -- say, Greece -- unable to meet its liabilities. Germany hates this door, but it would do the most to mitigate market pressures on the periphery.

Door No. 2 seeks to tackle the moral hazard question by creating a mix of national bonds and Eurobonds. The fundamental disagreement is on the degree of the mix. The greater the proportion of Eurobonds, the less market pressure a country faces, thereby discouraging demanding but necessary reforms. Too great a percentage of risky national bonds, and you have defeated the purpose. The most commonly discussed proposal is a 60/40 Eurobond/national bond split so that member states that stay within a ratio of 60 percent debt to GDP (a rule enshrined in the fiscal compact treaty) will receive Eurobonds; anything over that amount and market forces will punish. No one has a clue how to manage this scenario, let alone how long it will take to create the mechanisms to do it.

Door No. 3 is called the European Debt Redemption Fund. This variation would involve joint guarantees by the 17 eurozone countries for any national debt exceeding the 60 percent debt-to-GDP ratio. Each individual country would still be held accountable for the majority of its debt, and the European Commission would take responsibility only for a set period of time, after which member states would be required to reassume their liabilities.

The perfect Eurobonds would be an instrument with a mandate broad enough to halt the crisis but punitive enough to mitigate the risks of moral hazard -- a tall order. To say that you support Eurobonds could mean a variation of the aforementioned options, all fraught with complexity. If European decisionmaking to date tells us anything, it is that the least-common-denominator, minimalist option eventually will be selected, but too little and too late to effect change.

One variation on the Eurobonds idea that has gained traction in recent weeks is something called "project bonds" -- financial instruments backed by the EU budget that can be used to finance infrastructure projects relating to energy, transportation, communication, and information networks. The idea, which the European Parliament has reached agreement on, offers a way to stimulate growth in the peripheral eurozone countries as they continue to implement structural reforms. Promisingly, $293 million of EU capital has been reserved for this effort, with more on the way should it prove successful.

But while project bonds can help attract private-sector investment, they cannot be a substitute for it. It is likely that these project bonds would only support about 10 projects throughout the EU until 2014 -- hardly a panacea.

Moreover, collectivized debt in the form of a Eurobond won't reduce the overall levels of European sovereign debt, solve Europe's structural problems, right trade deficits, improve competitiveness, stimulate long-term growth, or reverse public indebtedness. And that is exactly what countries like Greece and Spain need to do, as painful as it will be.

What Eurobonds can do, given the right formulation, is stall an escalating crisis -- an outcome that would be greeted with a sigh of relief in Washington, Beijing, and other world capitals in the near term. But the crisis will only come back with a greater vengeance, likely consuming Europe's stronger economies with it.

Of course, at the end of the day, the decision on whether or not to introduce Eurobonds rests with the area's strongest economy: Germany. To put it another way, is Germany willing to transfer its wealth, increase its borrowing costs, and increase inflation to save indebted European nations, or isn't it?




The List

Romney: Year One

What would happen if you took Mitt Romney's foreign-policy promises extremely literally?

Sure, some might argue that there would be no real differences between the second-term foreign policy of President Barack Obama and the first-term foreign policy of President Mitt Romney. They might even be correct in pointing out that foreign-policy campaign rhetoric matters little once the candidate becomes the president.

Just for fun, however, what if all those campaign words did matter? What if President Romney had to implement every foreign policy campaign promise he's ever made in every foreign-policy white paper, op-ed, campaign statement, or random utterance that came from his campaign? What would the first year of a Romney presidency look like when it met the real world?

The editors of Foreign Policy thought that would be a fun little thought experiment, and they've been keenly aware that I have paid close attention to Romney's foreign policy musings. So, at their request, here's what the first year of a Romney administration would look like for world affairs.

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DAY 1: The first day of a Romney presidency brings two major shifts in foreign policy. First, Romney announces that he has "designated [China] as a currency manipulator" and demands that China play by the trade rules. Second, he reinstates the Mexico City policy. Combining these two policies, he also "cut[s] off funding for the United Nations Population Fund, which supports China's barbaric One Child Policy."

The effect: Labeling China as a currency manipulator means the United States must bring the issue to the International Monetary Fund. Given how the IMF has handled past accusations of Chinese currency manipulation this means that ... nothing will change. The Mexico City policy will shift the strategies of various development NGOs, echoing what happened when George W. Bush became president in 2001. Yawn.

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DAY 30: In his first State of the Union address, President Romney unveils his first set of defense proposals. He pledges to "reverse Obama-era military cuts" and announces his policy of ensuring that "core defense spending" will never fall below "a floor of 4 percent of GDP." The pace of shipbuilding will also be accelerated to "increase the naval shipbuilding rate from nine per year to approximately 15 per year" and no carriers will be mothballed.

The effect: With likely GOP majorities in both houses of Congress, and numerous Democrats unwilling to look soft on national security, President Romney is easily able to pass a new National Defense Authorization Act that incorporates the new defense buildup. To offset costs, the "bloated" civilian bureaucracies in the Pentagon are severely cut, drastically reducing oversight on procurement-related matters.

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DAY 60: With his cabinet fully in place, President Romney can now focus on some of his major foreign-policy priorities, like preventing Iran from acquiring nukes. As a candidate, Romney pledged to implement "a fifth round of sanctions targeted at the financial resources that underpin the Iranian regime and its Revolutionary Guard Corps."

The effect: Minimal. Congress will be eager to impose such sanctions, but the really crippling ones -- on Iran's oil exports -- were imposed by the European Union in the summer of 2012.


DAY 100: This is a big day for the Romney administration's foreign policy. According to its campaign white paper, the administration by this day will have restored America's naval capability, strengthened and repaired all relationships with major allies, committed to a robust national missile-defense system, launched an economic opportunity initiative for Latin America, and ordered an interagency initiative on cybersecurity. All of that is peanuts, however, next to the fact that by this day, Romney's "full interagency review of our military and assistance presence in Afghanistan" will have been completed. Which means we will now know what the Romney administration's Af-Pak policy will be!

The effect: Your guess is as good as mine. Based on Romney's campaign rhetoric, all we can be sure of is two things. First, generals on the ground will be consulted. Second, the goal will be victory, not negotiating with the Taliban. If those two imperatives conflict ... well, then, your guess is as good as mine.


DAY 150: By this point, Romney's pledge to "review the implementation of the New START treaty" with Russia, our No. 1 geopolitical foe, will have been completed. So far, implementation seems to be going OK, but one can only guess at how the Russians will handle a president Romney trying to wean Europe from the grip of energy dependence on Moscow (not to mention how the Kremlin will respond to his calls to get tough on Iran and Syria).

The effect: Minimal. Even if Romney dislikes New START, it's just as likely that the United States withdraws from this treaty as President Obama withdrawing from NAFTA. Not gonna happen.


DAY 200: The 2013 summit in St. Petersburg creates some ticklish problems for the Romney administration. Beyond the pain of visiting America's top geopolitical foe, candidate Romney called for the publication of all exchanges between heads of state during the campaign. Romney therefore proposes that the entirety of the G-20 heads of state summit be recorded, with a transcript made available to the press for greater transparency.

The effect: Romney scores the biggest laugh in the history of the G-20 summits, thereby breaking the ice with other world leaders.


DAY 250: In the run-up to Romney's first East Asian trip, his administration updates the "pivot" with three new initiatives. First, as part of his pledge to coordinate closely with Taiwan on that country's defense needs "with adequate aircraft and other military platforms," the United States agrees to sell F-16 fighter jets to the Republic of China. Second, Romney proposes renaming the Trans-Pacific Partnership the "Asia-Pacific Reagan Economic Zone." Third, Romney says his envoys would "persuade China to commit to North Korea's disarmament" by "demonstrat[ing] to the Chinese that they should join the coordinated effort or be left behind as a regional counter-proliferation partner."

The effect: These combined moves provoke a very strong Chinese response. Beijing blasts the arms sales and accuses the Romney administration of intruding into matters of exclusive Chinese sovereignty. In response, the PLA Navy aggressively expands its operations in the South China Sea to put pressure on U.S. allies in the region. China further rejects the offer to join a Reagan Economic Zone. On the other hand, China is quite taken with the Romney administration's efforts to persuade Beijing that, after more than a half-century of backing North Korea and enduring almost two decades of American harangues, it is now in its best interests to pressure North Korea. Hah -- just kidding!! Romney's efforts at persuasion bear no fruit.