Europe's Joint Bond Dilemma: A Risky Path to Compete with the US

The US dollar's loss of confidence has sparked debate over whether Europe should adopt joint bonds to compete with the American Treasury market. However, experts argue that this solution comes with its own set of problems. The core issue lies in the fact that the euro lacks a counterpart to the US Treasury bond, which serves as a reserve, collateral, and benchmark for other assets.

The size and liquidity of safe securities like Treasuries do not cure underlying fiscal problems. Critics call this the 'exorbitant privilege,' where investors accept lower interest rates in exchange for security and liquidity. This convenience yield has allowed the US to finance its deficits at a lower cost than comparable countries without a reserve currency.

Proponents of joint bonds argue that they could create a clearer benchmark interest rate, unify swap markets, and make cross-border corporate financing cheaper. However, this would also increase European savings' dependence on the next budget compromise and push yields down, making equity and debt financing cheaper for companies but more difficult to find current interest rates for insurers and pension funds.