The launching of E-bonds, or European sovereign bonds by a European Debt Agency (EDA) would help to send a clear message to global markets and European citizens of political commitment to economic and monetary union, and the irreversibility of the euro. To create a sufficiently large market for the E-bonds, the EDA should finance up to 50% of issuances by EU members. EDA should also offer a switch between E-bonds and existing national bonds. The conversion rate would be at par, but the switch should be discounted at a rate dependent on the bond's current market stress. This would help to create a strong incentive to reduce their deficits.
With a liquid global European bond market, nations will be insulated from speculation and more capital flows would be attracted to Europe. This would be the best response to the ongoing sovereign debt crisis.
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