'Eurobonds' could help debt crisis

A giant symbol of the European Union's currency, the euro, stands outside the headquarters of the European Central Bank in the central German city of Frankfurt am Main.

STEVE CHIOTAKIS: Overseas, in Germany today, well that country reported second quarter GDP grew by just 0.10 percent. The news comes on the day German leader Angela Merkel meets with French president Nicolas Sarkozy. The two will no doubt talk about today's news and of course, the European debt crisis. And one idea that's being tossed around to help the European economy is to allow Eurozone countries to borrow money collectively -- in the form of a "Eurobond."

From London, reporter Christopher Werth explains what exactly that is.


CHRISTOPHER WERTH: As we're learning, governments tend to spend more than they take in. So, in order to cover the extra spending, governments borrow money by issuing bonds.

They're basically IOU's that say, "don't worry we'll pay you back." Banks and other countries are willing to take those IOUs, with a little interest, because they expect to be paid back. And that's why the European debt crisis is such a big problem. People who lent money to Greece, Ireland and Portugal are worried those countries won't make good on their promises.

So now Greece, Ireland and Portugal have to pay more interest -- to convince lenders that the extra risk is worth it. Thus, the proposal for a "Eurobond" issued by all 17 countries that use the Euro as their currency. The idea is that more people would be willing to lend to a country like Greece -- if the loan is backstopped by a country like Germany.

JENNIFER MCKEOWN: Because Germany is guaranteeing those loans, investors know that they should get their money back.

Jennifer McKeown is with Capital Economics. She says in theory, the idea could go a long way in helping Europe deal with its debt problems

MCKEOWN: However, I think most indications are that the German public just wouldn't accept it.

German Chancellor Angela Merkel is adamantly opposed to the idea because that would put German taxpayers directly on the hook for the debt of Greece and other struggling countries.

But David Marsh, the author of the book "The Euro," says Europe is at a crossroads. He says down one path is the unenviable idea of the Eurobond, which could drive up the borrowing costs for Germany, Europe's largest economy.

DAVID MARSH: And down the other fork lies quite considerable chaos if the Euro is forced to split up in coming years.

While Europe waits for Eurobonds, the European Central Bank is already stepping up to the plate.

Last week, it bought over $30 billion in bonds from troubled countries, including Italy and Spain -- that provided more demand for those bonds and, at least momentarily, reassured investors that those countries will pay back their IOUs.

In London, I'm Christopher Werth for Marketplace.

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