Growth and sovereign debt in the EU: two innovative proposals

The European Economic and Social Committee says: Union Bonds for stabilising deb and Eurobonds for recovery and growthcould also be promoted on an enhanced cooperation basis. Here are some extracts.

European Economic and Social Committee

The European Economic and Social Committee advocates the introduction of two complementary but distinct EU bonds: (1) Union Bonds for stabilising debt, (2) Eurobonds for recovery and growth. The EESC recommends also the use of a share of the net inflows into Eurobonds to finance a European venture capital fund, which was one of the design aims of the European Investment Fund (EIF) .

Union Bonds – gradually converted national debt of up to 60% of GDP to Union Bonds -could be held in a consolidated but untraded debit account. Since they are not traded they would be ring fenced against speculation by rating agencies. But they would not need fiscal transfers. Member States whose debt is held in Union Bonds would service their share of them. The conversion would also mean that most of them would then be Maastricht compliant in relation to their remaining national debt. Greece would remain a special problem, but no more than that, and would therefore be manageable.

The Stability and Growth Pact would not require revision in order to achieve this, but it would gain the credibility it currently lacks amongst markets and electorates since stability would be achieved without austerity. Furthermore, converting a substantial proportion (up to 60%) of the debt of the EU's indebted countries could be by an"enhanced cooperation" procedure .Those Member States preferring to do so could keep their own bonds .

Unlike Union bonds, Eurobonds issued to finance recovery and growth would be traded and could attract funds into the EU. The BRICS - Brazil, Russia, India, China and South Africa - reconfirmed in September 2011 that they were interested in holding reserves in euros in order to help stabilise the euro area. Doing so by means of Eurobonds rather than by national bonds could strengthen the euro as a global reserve currency and help the emerging economies achieve their ambition for a more plural global reserve currency system.

Eurobonds need not count on the national debt of Germany or any other Member State nor need joint or several sovereign guarantees. The European Investment Bank has been successfully issuing bonds without the need for recourse to national guarantees for more than 50 years and done so with such success that it already is twice as large as The World Bank.

What the EU needs is to regain the confidence of the people of Europe that the single currency is to their mutual advantage, This implies an economic, social and cultural Action Programme and a "new European pact", along the lines of America's "New Deal", whose success encouraged President Truman to back The "Marshall Plan" which, as well as aiding recovery in the post-war period, enabled all European countries to enjoy sustained development based on competitiveness, productivity, employment, welfare, prosperity and, above all, consensus (participation and social partnership).

A higher political profile also should be given to the fact that, while some Member States are deeply indebted, the Union itself has next to no debt. Until May 2010 and the beginning of national debt buy-outs it had none at all. Even after buy-outs and bank rescue operations, Union debt is little more than one per cent of Union GDP. This is less than a tenth of the debt to GDP ratio of the US in the 1930s when the Roosevelt administration began to shift savings into investment through the expansion of US Treasury bonds . Unlike the US, the EU has a late starter advantage on bonds.

 Union Bonds to stabilise national debt

Sovereignty can be restored by means of the Union, enabling governments, rather than the financial markets to govern. This can be done, however, without debt buy-outs or joint sovereign guarantees or fiscal transfers.  For example, in funding the New Deal, the Roosevelt administration did not buy out the debt of Member States of the American Union, nor require them to guarantee US Treasury bonds nor demand fiscal transfers from them. The US funds its Treasury bonds from federal taxes, whereas Europe does not have a common fiscal policy. However, Member States can finance the share of their national bonds converted to Union Bonds without fiscal transfers between them.

The conversion of a share of national debt to the Union could also be on an enhanced cooperation basis, with key Member States, including Germany, retaining their own bonds. According to the Lisbon Treaty, enhanced cooperation is between a minority of Member States. Yet the introduction of the euro itself was a de facto case of enhanced cooperation amongst a majority. The Bruegel institute has proposed a new institution to hold the conversion of national sovereign debt to the Union . But a new institution is not needed.

The converted share of national debt into Union Bonds could be held by the EFSF (then by the ESM) in a debit account rather than traded. This would ring fence the converted bonds from speculation. The investors would keep their assets until maturity of the bonds at their prevailing rate of interest. This would also avoid moral hazard because bonds in a debit account could not be use for net credit creation. The advantage for both governments and bond holders is that the risk of default by some Member States thereby will be significantly reduced..

 Eurobonds, to restore recovery and sustainable growth

For example, one of the points made forcefully by a number of proposals appearing in the press that echo the Bruegel proposal and the earlier 1993 proposal of Union Bonds to Delors, was that net issues of Eurobonds would attract surpluses from the central banks of emerging economies and sovereign wealth funds, producing a multiplier effect.

These financial inflows to Eurobonds could turn the commitment since 2008 of the Member States and the European Parliament to a European Economic Recovery programme into a reality. Although the initial flotation of the bonds would be incremental, the cumulative inflows from a share of the almost USD 3 trillion of the surpluses of the central banks of the emerging economies and sovereign wealth funds would be substantial.

The inflows could well come to match or exceed the Commission’s own resources and do so without the fiscal transfers which Germany and some other Member States oppose.. They also could co-finance investments by the EIB Group in the cohesion areas of health, education, urban renewal and the environment.

The ECB need not be involved in net bond issues. The initial design for the Union to issue its own bonds was that this should be by the European Investment Fund, which was set up in 1994 and has been part of the EIB Group since 2000. The primary design role for the EIF was for common bonds to counterpart a common currency. Its secondary design was financial support for small and medium firms and new high tech start-ups, which has been its sole role since 1994 .

The initial EIF design recognised that a single currency would deprive Member States of devaluation as a means of balance of payments adjustment, and that there was no political support for fiscal transfers on the scale recommended by the MacDougall Report . But, drawing on the precedent of the New Deal, it recognised also that European bonds could finance structural, social and regional policies which had been the intent of the 1956 Spaak Report for a Common Market .

EIF issues of Eurobonds could complement EIB bonds in joint project financing. The servicing of the bonds could be from revenues gained from investment projects rather than from fiscal transfers. The EIB would retain control, with the projects dependent on its approval, and managed by it, thereby safeguarding its integrity in project management.

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