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Tornell, Aaron

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Libération - France | 30/08/2011

Common bonds will be abused

Euro bonds can mean greater cumulative debt in Europe, write the economics professors Romain Rancière and Aaron Tornell in the left-liberal daily Libération: "Unlike the support mechanisms of the IMF and the European Union, issuing euro bonds will not be limited to periods of crisis. On the contrary, in times of prosperity as the fiscal situation improves, more countries will become eligible to emit a growing number of euro bonds. Each one of these states will then be interested in refinancing its standard bonds by issuing euro bonds, the default risk being implicitly borne by the other states. In this way the states would follow their own interests and ignore the effect the growing number of euro bonds in circulation would have on the entire the Eurozone states as a whole. ... This form of 'tragedy of commons' leads to an excessive total debt, with dramatic consequences when the prosperity ends."

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