Inflation in the US or Europe would reduce the purchasing value of the dollar bonds or euro bonds.

But, because Greek euro bonds were regarded as a close substitute for other countries euro bonds, the interest rate on Greek bonds did not rise as Greece increased its borrowing until the market began to fear a possible default.

For example, a German investor would consider United States bonds to have more currency risk than German bonds (since the dollar may go down relative to the euro) similarly, a United States investor would consider German bonds to have more currency risk than United States bonds (since the euro may go down relative to the dollar).

When the euro was introduced, the authorities actually declared member states government bonds to be riskless.

Yet they are the obvious solution to the root cause of the euro crisis, which is that joining the euro exposed member countries government bonds to the risk of default.

If the dollar is likely to fall against the euro over the next several years, investments in euro denominated bonds issued by the German or French governments may provide higher safe returns.

Loans would be provided by other EU countries if necessary, taking the form of covered state bonds collateralized with privatizable state assets.

Unlike the financial junk pouring out of the US in recent years, covered bonds are a security that is worthy of the name.

Promoting a pan European private placement market might help, as would aligning standards for covered bonds. But both strategies would face serious legal obstacles.

The current differences in the interest rates of euro zone government bonds show that the financial markets regard a break up as a real possibility.

Inflation in the US or Europe would reduce the purchasing value of the dollar bonds or euro bonds. The Chinese would still have as many dollars or euros, but those dollars and euros would buy fewer goods on the world market.

One example is Eurobonds, which Merkel has declared taboo. Yet they are the obvious solution to the root cause of the euro crisis, which is that joining the euro exposed member countries government bonds to the risk of default.

First, interest rates are higher on euro and British bonds than on similar US securities, making investments in those currencies more rewarding than investments in dollars.

In order to prevent sinners from getting caught in a debt trap, the fines could take the form of covered bonds collateralized with privatizable state assets.

The widening spreads between the interest rate on German eurobonds and some of the other countries euro bonds show that global bond markets take this risk seriously.

Investors would be able to buy Guatemala s coffee bonds, Côte d Ivoire s cocoa bonds, Liberia s rubber bonds, Mali s cotton bonds, and Ghana s gold bonds.

Jamaica, for example, would issue aluminum bonds Nigeria would issue oil bonds Sierra Leone would issue iron ore bonds and Mongolia would issue copper bonds.

But if governments and central banks are serious about identifying alternatives to the dollar and the euro, now is the time to start and GDP linked bonds are the place to look.

An even better solution would be to go the European way get rid of non recourse loans and develop a system of finance based on covered bonds, such as the German Pfandbriefe .

In particular, since the European Central Bank has clearly rejected quantitative easing, investors will want to buy euro bonds issued by Germany and other European countries that are not in danger of default.

Increasingly, the small spreads between sovereign bonds relied on the implicit assumption that no euro area member would be allowed to get into major difficulties, despite the constraints imposed on intergovernmental rescue operations.

The EU s maneuvers may stabilize Europe in the short run and help it to withstand better the current speculative attacks on some of the euro countries government bonds, but they risk long term destabilization.

Junk public bonds are no safer for them than junk private bonds.

Staggered alignment of economic and social policies (such as the legal retirement age), new balancing schemes (euro bonds as a transfer instrument), and an effective stability mechanism are all needed to preserve the common currency.

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Markets noticed that the euro seemed caught between a rock (the EFSF s limited borrowing capacity) and a hard place (the European Central Bank s great reluctance to engage in large scale purchases of financially troubled governments bonds).

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But a decision to purchase sovereign bonds would also need to build on and factor in the institutional specificities of the euro area, including the limits set by the EU Treaty. We take these limits very seriously.

As the bond market begins, finally, to price in greater relative risk in euro zone sovereigns, the intellectual underpinnings of the idea of a global division between emerging market and developed market bonds will be fundamentally tested.

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Expensive government bonds will shift demand to mortgage or corporate bonds, pushing up their prices.

Finally, GDP indexed bonds and other tools for dealing sensibly with unsustainable debt could be applied exclusively to member states debt not covered by the program and in line with international best practices for sovereign debt management.