The current methods being used to return the eurozone to financial stability have reached their limits, according to the latest BofA Merrill Lynch Global Research report, especially as they fail to address the underlying problem.
A lack of fiscal discipline led to the current crisis and was further reflected in the efforts made to solve it, as the Greek rescue constituted a “breach of the no-bail-out rule”, the bank says.
“The no-bail-out rule was abandoned because eurozone financial systems have become interdependent since the creation of the euro,” says the report.
BofA argues that a return to fiscal discipline would require a partial surrender of sovereignty, so that policies can be decided at a national level.
The implication is also that a ‘supranational body’ would be required in a supervisory position with the power to “supersede national fiscal decisions”.
In order to ensure that such an instrument would have a good credit quality from the outset, restricted access should be a key feature of the eurobonds debate, which could also see a review of the Maastricht criteria.
However, the end goal should be to ensure that “the entire debt-to-GDP ratio of participating countries [is] swapped into a eurobond”.