Is a euro-zone bond issue the answer to Greece's problems? Prime Minister George Papandreou unsurprisingly thinks it a good idea. But he and other European leaders shouldn't waste time fantasizing about it. Even if there weren't huge technical, political, economic and legal headaches to solve, a euro-zone bond could cause more problems than it solves at present.

The attraction of a euro-zone bond is that it would provide cheaper funding to countries whose borrowing costs have risen sharply as a result of the crisis: mainly Greece, but also Portugal and Ireland. But any advantages in terms of increased European solidarity are far outweighed by the costs associated by a huge increase in moral hazard.

Issuing a euro-zone bond would remove all incentive for weaker states to take difficult decisions; they would be able to spread the pain to taxpayers in other countries instead. Borrowing costs would likely rise for other euro-zone members, including those viewed by the markets as having maintained relative fiscal solidity, such as Germany, Finland and the Netherlands, ultimately leading to tax hikes or spending cuts.

The euro-zone's "no bail-outs" approach would have been shown to be fatally flawed—and the currency bloc's credibility, already damaged by failures to enforce sanctions against countries breaking the Stability and Growth Pact rules, would be further damaged.

In the longer-term, and in calmer economic waters, a shift to issuing debt at the euro-zone level might make sense—but only if introduced for the right reasons. A common euro-zone debt market could be more liquid than the multitude of national markets, making the euro more attractive as a reserve currency; this is an aspect that benefits U.S. Treasurys, after all. But this would require a radical centralization of political authority, and further changes to European treaties. Given the trauma of the Lisbon treaty process, few would have appetite for it now.

by Matthew Slaughter

Mr. Slaughter is associate dean and professor at the Tuck School of Business at Dartmouth, research associate at the National Bureau of Economic Research, and senior fellow at the Council on Foreign Relations. From 2005 to 2007 he served as a member of the White House Council of Economic Advisers.

Deep in the president's budget released Monday—in Table S-8 on page 161—appear a set of proposals headed "Reform U.S. International Tax System." If these proposals are enacted, U.S.-based multinational firms will face $122.2 billion in tax increases over the next decade. This is a natural follow-up to President Obama's sweeping plan announced last May entitled "Leveling the Playing Field: Curbing Tax Havens and Removing Tax Incentives for Shifting Jobs Overseas."

The fundamental assumption behind these proposals is that U.S. multinationals expand abroad only to "export" jobs out of the country. Thus, taxing their foreign operations more would boost tax revenues here and create desperately needed U.S. jobs.

This is simply wrong. These tax increases would not create American jobs, they would destroy them.

Academic research, including most recently by Harvard's Mihir Desai and Fritz Foley and University of Michigan's James Hines, has consistently found that expansion abroad by U.S. multinationals tends to support jobs based in the U.S. More investment and employment abroad is strongly associated with more investment and employment in American parent companies.

When parent firms based in the U.S. hire workers in their foreign affiliates, the skills and occupations of these workers are often complementary; they aren't substitutes. More hiring abroad stimulates more U.S. hiring. For example, as Wal-Mart has opened stores abroad, it has created hundreds of U.S. jobs for workers to coordinate the distribution of goods world-wide. The expansion of these foreign affiliates—whether to serve foreign customers, or to save costs—also expands the overall scale of multinationals.

Expanding abroad also allows firms to refine their scope of activities. For example, exporting routine production means that employees in the U.S. can focus on higher value-added tasks such as R&D, marketing and general management.

The total impact of this process is much richer than an overly simplistic story of exporting jobs. But the ultimate proof lies in the empirical evidence.

Consider total employment spanning 1988 through 2007 (the most recent year of data available from the U.S. Bureau of Economic Analysis). Over that time, employment in affiliates rose by 5.3 million—to 11.7 million from 6.4 million. Over that same period, employment in U.S. parent companies increased by nearly as much—4.3 million—to 22 million from 17.7 million. Indeed, research repeatedly shows that foreign-affiliate expansion tends to expand U.S. parent activity.

For many global firms there is no inherent substitutability between foreign and U.S. operations. Rather, there is an inherent complementarity. For example, even as IBM has been expanding abroad, last year it announced the location of a new service-delivery center in Dubuque, Iowa, where the company expects to create 1,300 new jobs and invest more than $800 million over the next 10 years.

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I had gone to bed modestly optimistic about our chances of saving Lehman. The Barclays bid was proceeding, and Diamond had a board meeting scheduled for early that morning in London.

Tim spoke with Diamond after the Barclays board meeting, at 7:15 a.m. New York time, and Bob warned him that Barclays was having problems with its regulators. Forty-five minutes later, I joined Tim in his office to talk with Diamond and Varley, who told us that the FSA (Financial Services Authority of the U.K.) had declined to approve the deal. I could hear frustration, bordering on anger, in Diamond’s voice.

We were beside ourselves. This was the first time we were hearing that the FSA might not support the deal. Barclays had assured us that they were keeping the regulators posted on the transaction. Now they were saying that they didn’t understand the FSA’s stance. At 10 a.m., we met with the bank chiefs again, and I told them we had run into some regulatory issues with Barclays but were committed to working through them. The CEOs presented us with a term sheet for the deal. They had agreed to put up more than $30 billion to save their rival. If Barclays had committed to the deal, we would have had industry financing in place.

At 11 a.m., I went back upstairs, and soon got on the phone with (British Finance Minister) Alistair Darling, who wanted a report on Lehman. I told him we were stunned to learn that the FSA was refusing to approve the Barclays’ transaction.

He made it clear, without a hint of apology in his voice, that there was no way Barclays would buy Lehman. He offered no specifics, other than to say that we were asking the British government to take on too big a risk, and he was not willing to have us unload our problems on the British taxpayer.

It was shortly before 1 p.m. when Tim, (Security and Exchange Commission Chairman) Chris (Cox) and I addressed the CEOs again. I was completely candid. Barclays had dropped out, and we had no buyer for Lehman.

“The British screwed us,” I blurted out, more in frustration than anger. I’m sure the FSA had very good reasons for their stance, and it would have been more proper and responsible for me to have said we had been surprised and disappointed to learn of the UK regulator’s decision, but I was caught up in the emotion of the moment.

Back in my temporary office on the 13th floor, a jolt of fear suddenly overcame me as I thought of what lay ahead of us. Lehman was as good as dead, and AIG’s problems were spiraling out of control. With the U.S. sinking deeper into recession, the failure of a large financial institution would reverberate throughout the country—and far beyond our shores. It would take years for us to dig ourselves out from under such a disaster.

All weekend I’d been wearing my crisis armor, but now I felt my guard slipping. I knew I had to call my wife, but I didn’t want to do it from the landline in my office because other people were there. So I walked around the corner to a spot near some windows. Wendy had just returned from church. I told her about Lehman’s unavoidable bankruptcy and the looming problems with AIG.

“What if the system collapses?” I asked her. “Everybody is looking to me, and I don’t have the answer. I am really scared.”

I asked her to pray for me, and for the country, and to help me cope with this sudden onslaught of fear. She immediately quoted from the Second Book of Timothy, verse 1:7—”For God hath not given us the spirit of fear, but of power, and of love, and of a sound mind.”

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