Eurobonds: beware of splitting the bill

When German central bankers and economists warn of the “moral hazard” of a debt union, and talk of the importance of market interest rates in providing “incentives to fiscal discipline” in individual member states, that might seem rather abstract compared with the here-and-now crisis in Eurozone sovereign debt markets. Let’s make it a bit more concrete by considering something we’re all familiar with: splitting the bill.

When we each pay for our own dinner at a restaurant, we decide what we want to eat, bearing in mind the cost to us of our choices.  Similarly, when the government of an individual member state of the Eurozone pays interest on its own debts, it decides how much to spend and borrow (and how much to bear the political costs involved in reforming labour markets and other parts of the economy in ways that promote growth), bearing in mind the cost to it of its choices. But when diners split the food bill in a restaurant, or the governments of the Eurozone split the interest cost bill in a debt union, those incentives change. Instead of bearing in mind how our choices impact on our own costs, we consider how our choices impact on the total cost across all diners or governments. That will tend to mean that we eat/spend-and-borrow more, because others bear the costs.

OK, so the point is perhaps clear. But is it really significant? Are we talking a lot more, or just a little? This question was addressed in a well known academic study in the Economic Journal in 2004 – “The inefficiency of splitting the bill“, by Gneezy, Haruvy and Yafe. These authors conducted experiments with diners (strangers to one another), some of whom paid individually whilst others split the bill. Those that split the bill spent about 36 percent more than those that paid individually. That’s right: splitting the bill with strangers adds more than one third to the cost of lunch.

That’s what the Germans, Austrians, Dutch, Slovakians, Finns can expect if they agree to split the bill with the Spanish, Portuguese, Greeks, Irish, etc. in a Eurobond debt union. It’s human nature.