If the eurobonds become a permanent part of the European Union, the implications are global. A United European bond market could save the eurozone’s struggling economies.
But that is not the biggest implication. For the first time, the U.S. treasury market will have a real and potentially lethal competitor, and the world will finally have a true alternative to the dollar for reserve currency.
According to the Financial Times, the first bond auction in January led to “overwhelming demand" for the paper from investors around the world. The second issuance in March was equally successful, as investors in Asia and the Middle East snapped up the bonds. The success of the eurobond sales contrasts sharply with the rising cost of raising money in most European countries.
A European-wide debt crisis may be looming. And that means a European-wide solution is needed. But if investors start holding out for eurobonds instead of buying bonds directly from individual nations, it could become even more difficult for troubled countries to borrow money. Weak countries could, in effect, be crowded out of the debt market. Investors love the eurobonds, said one banker quoted by the Irish Times. But if you buy a eurobond, “why on earth would you buy Spain?” he asked. “The risk is just too great.”
If the current round of eurobond auctions proceed as expected, or are expanded, this could in time force troubled nations into giving up national budget sovereignty in return for Germany backing the creation of a permanent eurobond market. As analyst John Mauldin writes, it wouldn’t end with Germany controlling Greece’s budget and in charge of collecting Greece’s taxes. If Europe goes down that route, he says, it may be Greece today, but it will be Portugal tomorrow. And which nation will be next after that? American officials should be watching closely.
On the global stage, U.S. treasuries are the unrivaled debt marketplace in terms of volume and liquidity. Consequently, the dollar is used as the world’s reserve currency. But America’s hold on reserve status is precarious. It maintains it mostly by default. China, Russia, Germany, Brazil and other nations have publicly stated that they want a new global reserve currency not linked to a dollar that constantly devalues. The problem is that up until possibly now, there just hasn’t been a credible alternative. There has been no other big market in which to park their money. That may be about to change. A full-fledged European Union bond market may be about to be born from Europe’s economic crisis. If it is, the dollar’s days as reserve currency are about to end.
America is no longer a safe place and the world may soon have an alternative place for all its money. A new global financial system is about to emerge.