The argument goes that with a joint and severally guaranteed Eurobond, the low refinancing cost of Germany would be exported to the periphery, at marginal cost to Germany. The cost would be a function of Germany’s refinancing cost today, relative to the weighted average spread of Eurozone sovereigns either today, or at some arbitrary point in the past.
We find this argument fundamentally flawed: if a Eurobond just mutualises debt issuance, the default probability of a Eurobond is the default probability of the largest country that cannot be bailed out by the core. This is because Germany and other AAA countries alone cannot credibly guarantee the debt of the entire Eurozone. This is the fundamental difference between a Federation, such as the US or Germany, and a Union of sovereign member states, such as EMU.
