Bonds

These are a very important element in the eurozone crisis. Everything revolves around bonds issued by national governments, known as government bonds. They're the main reason why a country becomes financially unstable, or may even go bankrupt. Governments obtain money for their national budgets from investors through government bonds, as well as through national debt. The money is then paid back with interest over a period of six months, three years, or six to ten years.

Government bonds were long considered a low-risk investment, but the eurozone crisis has changed all that. Now, investors are only willing to invest in countries in financial crisis if the risk they take is a profitable one. Generally it is, because these governments urgently need the money and are therefore willing to pay a much higher rate of interest.

The interest rate is a good indicator of whether a government's finances are likely to recover. If the interest rate of long-term government bonds (to be paid back in six to ten years) exceeds seven percent, the government will be too deeply indebted to bounce back. At this point, the country needs aid in the form of a bailout.

Banking union

In times of crisis, the EU must first and foremost rebuild confidence. This is where it would be useful to have a banking union. The name alone conjures up solidarity and trust. There have already been discussions about replacing national banking supervision with a coordinated European banking supervisory authority. There could also be a common European deposit protection that would protect deposits in European bank accounts. But this is problematic, particularly for Germany. German credit institutions don't want to take indirect responsibility for ailing banks in other countries. It's also unclear who would take on the role of banking supervisor.

EFSF - European Financial Stability Facility

The EFSF, whose headquarters are in Luxembourg, celebrated its second anniversary on June 7, 2012. The organization can borrow up to 440 billion euros ($589 billion) on the financial markets. The EFSF pays money back at a low interest rate because the wealthy eurozone countries are its guarantors. The rescue fund can give money to ailing countries when other lenders won't. If the EFSF collapses, Germany is liable for 211 billion euros ($259 billion), more than two-thirds of the country's annual tax revenue. The EFSF is to be replaced by the ESM (European Stability Mechanism) by mid-2013 at the latest.

ESM - European Stability Mechanism

The ESM is scheduled to permanently replace the EFSF (European Financial Stability Facility) by mid-2013. The main difference between the ESM and EFSF is that the eurozone countries will be paying real money into the organization. In the EFSF, the wealthiest countries currently act only as guarantors. The ESM has up to 500 billion euros ($614 billion) in loans on hand with which it can buy government bonds from or give money directly to ailing countries. At 27 percent, Germany is the biggest guarantor and provides the most money to the ESM.

The ESM was actually supposed to be ready to start work in June of this year, but the German Constitutional Court is still reviewing its status. The EU expects a decision from the court by September at the earliest.

ESM banking license

Every commercial bank needs a banking license if it wants to borrow money from the European Central Bank (ECB). It must also provide security in order to receive the money. Those who have financed European bailouts want the ESM (European Stability Mechanism) to receive a similar banking license. That way, the ESM would have considerably more money with which it could help eurozone countries, either by purchasing government bonds or by raising loans. A banking license would enable the ESM to use these government bonds as security for the ECB. That would then allow the ESM to borrow endless amounts of money and use everything in its power to rescue Europe, according to those who support the idea. Critics argue that this kind of banking license would violate existing EU agreements.

See Part Two for Eurobonds, the European Redemption Pact, credit rating agencies, and more.