1) as of 01.01.2013 all Euro countries will not issue national debt on the open market anymore. They remain liable for preexisting debt.
2) The EU will aggregate the Euro countries funding needs and place them on the open market (Eurobonds). The EU will be responsible for the payment. The EU will lend the money to the EU countries.
3) The EU will exercise a mark up. This markup will depend on predetermined rules. Mechanisms for changing the rules are included in the funding treaty. For example the EU might pay globally 2% to the market, but get a 2.6% globally from the Euro countries.
4) The markup is not constant in time, nor by country. The more a country is near or approaching a predetermined set of objectives, the smaller markup it will pay. A country “in order” will pay a very small mark up. A country getting out of control will pay an high premium. This premium is in any case smaller (and importantly, more predictable) than what this country would pay if it was alone on the market. The strength of this mechanism will ensure that the global Euro fund rate will be very low.
5) The markup is already an incentive to be “in order”, but the Economists will have to decide how to structure the mechanism so that lack of discipline (vs. cyclical downturns) will be automatically punished. It’s essential to set the mechanism out of day to day politics. The one hundred best Economists will be put in an hotel and forbidden to get out until they issue a complete mechanism.
6) Seriously misbehaving countries will be expelled by the Euro by one of above mechanisms
7) National debt to EU will have higher seniority than normal debt.
8) As “old debt” moves to Eurobonds, the EU will increase the revenue. This revenue is a perfectly legitimate payment because the aggregate cost of debt will be much lower in this way (fully reaping the benefits of mutualization). To note that the cost will not fall in any way on “rigorous” countries, and the cost to “weak” countries will be far lower than individually. Arguably the cost of debt will be lower for Germany as well.
9) The growing money flow to the EU (the markup) will fund EU policies, making the EU progressively more powerful (real power resides with the money). It is likely that the money will be invested more in weak Euro countries rather than strong, but without creating a “transfer union” (i.e. from the strong to the weak), but rather a transfer from the “benefits of Union” to the weak. One (predetermined) part of the flow will be put into an Euro sovereign fund, further strengthening the position of the Euro.
10) Countries out of the Euro will be forbidden to receive funds coming from this mechanism.
11) Greece debt will be reset in a unique and unrepeatable act of kindness.
12) The ECB will receive authority to become lender of last resort. Thus finally making the Euro a sovereign currency.
Given the immense benefits of mutualization, why the European politicians don’t do it?
Shortsightedness? Don’t want to transfer real power to the Union? Ignorance? Lack of ideas? It’s a real mystery….