A Tranche Transfer and Funding European Recovery

A tranche transfer of national debt of up to 60 per cent of GDP should be to the ECB which has higher credibility on markets than a debt agency such as the EFSF.

Jean-Claude Juncker and Giulio Tremonti have proposed a ‘tranche transfer’ of a share of national debt to Europe in the form of Eurobonds as a means of stabilising the current crisis and that this should be managed by a debt agency such as the EFSF already de facto represents.

They have done a major service by bringing Eurobonds - first proposed to and endorsed by Jacques Delors in 1993 - back onto the agenda.  Yet there are deep concerns about buying out national debt, not only in Germany, and not least because to date it has not stabilised bond markets.

This note draws on the precedent of state and federal finance in the US, the example of the US New Deal, and would mean that Eurobonds need not be guaranteed by member states and thus would not be a potential liability either for German, French or other taxpayers. 

Also that, a tranche transfer of national debt of up to 60 per cent of GDP should be to the ECB which has higher credibility on markets than a debt agency such as the EFSF.

Transfer Rationale

1. US Treasury bonds are not guaranteed by Calfornia or Delaware. President Roosevelt did not ask for such a guarantee in expanding them to finance the New Deal. Nor did he seek to buy out their State debt; nor does the debt of the member states of the American Union count on US federal borrowing. 

2. Eurobonds therefore do not need to be guaranteed by EU member states, nor depend on buying out national debt nor need count on the debt of EU member states. But to convince markets without buying up national debt, the ‘tranche transfer’ should be to the European Central Bank rather than to the EFSF even if the latter could be retained as an exceptional or emergency facility.

3. Although US Treasury bonds have no formal guarantee, bondholders know that the Treasury can service them from federal taxation. Yet Europe does not need federal taxation to service the bonds transferred to the ECB. The member states concerned would service their share of the Eurobonds from their own national taxation, but at lower interest rates.

4. Not all Eurozone member states need agree to the tranche transfer. Germany need not do so. But the transfer would be more effective if it were not only for those member states whose debt currently is most exposed, and therefore included, for example, both Italy and France.

5. There are Treaty provisions for a minority of member states to act jointly in terms of ‘enhanced cooperation’.  The creation of the euro itself was an example of de facto majority enhanced cooperation. If there is no unanimity on a tranche transer, enhanced cooperation could be deployed.

6. If the transfer were of up to 60% of debt as a share of GDP this would leave remaining debt for most member states within the national SGP limit. Thus Greece would be in excess of it, but by only some 20% rather than, currently, 80% while a phased reduction of its debt by 20% is credible, when a reduction of 80% is not.

Funding the European Economic Recovery Programme

Debt stabilisation through a ‘tranche transfer’ could create the conditions to make a reality of the commitment of the EU to a European Economic Recovery Programme. But there should be a clear distinction between a tranche transfer to the ECB to stabilise debt and net bond issues to finance an investment-led recovery programme.

1. The European Central Bank not only should hold the debt transferred to it in Eurobonds but offer net issues by them just as Roosevelt sanctioned net issues of US Treasuries during an even deeper economic and social crisis than now faces the Eurozone. 

2. Eurobonds will attract funds from the central banks of surplus economies and their sovereign wealth funds and fulfil the ambition of the emerging economies for a more plural global reserve currency system. The recent successful issue of €5 billions by the EFSF confirms this.

3. Eurobonds not only would transform the Eurozone from weakness into strength. The inflow of funds which they will attract, with bonds issued by the EIB, could co-finance the European Economic Recovery Programme to which EU governments have been committed since 2008 but which is being undermined by the current response to the national debt crisis.

4. The institution for approving EU investments for the EERP should be the EIB rather than the ECB. The EIB has the expertise to evaluate such projects in the cohesion areas of health, education and training, urban regeneration, environment and new technology remitted to it by the Luxembourg European Council of 1997 and also Lisbon 2000.

5. Just as, paralleling US Treasury bonds, Eurobonds need not count against the debt of member states, EIB bonds already are its own liability rather than that of the Union or of taxpayers. They are not counted against the debt of any of the major Eurozone member states, nor need by by others.

6. The twin case for Eurobonds as a global reserve currency and also financing a recovery of the European economy would be to the advantage of the US both by taking the strain off the dollar and recovering demand for US exports.

A Tranche Transfer and the SGP

One argument likely to be made against a tranche transfer is that it would weaken the SGP and especially the incentive to reduce what remained as national debt.  But it could safeguard the SGP since a transfer of national debt of up to 60% of GDP to the ECB would reduce what remained as national debt to within the SGP limits for most Eurozone countries.

For those which still were in excess - such as Greece in the example given earlier - the conditions for a tranche transfer could be more effective than fines – which would worsen national debt – if it were agreed by Ecofin that a member state not making progress on an agreed debt reduction would have its transferred debt to the ECB reduced by an equivalent amount.

The European Council and the ECB

Article 282 of the Lisbon Treaty specifies that ‘The primary objective of the European System of Central Banks (and of the ECB) shall be to maintain price stability’ but that:

‘Without prejudice to that objective, it shall support the general economic policies of the Union in order to contribute to the achievement of the latter's objectives’.

This wording is ‘support’ rather than ‘note’ or ‘take account of’ and parallels ‘zu unterstüzen’ in the constitution of the Bundesbank pm which the original text in the Maastricht Treaty was based.

The Treaty also allows that the European Council can define the ‘general economic policies’ of the Union of which one, on a recommendation from Ecofin, therefore could be a tranche transfer of national debt to the ECB either on a unanimous or enhanced cooperation basis.

Where there are some inflationary pressures in some member states these are due to global commodity inflation, not to European demand pressures. 

‘Crowding out’ should not be an argument against the tranche transfer since it would be neutral in demand terms. Nor against the EERP granted that even Milton Friedman allowed that crowding out would only obtain at full employment.

Stuart Holland

Formerly adviser on European affairs to Harold Wilson, Jacques Delors and Antonio Guterres. Currently Visiting Professor in the Faculty of Economics of the University of Coimbra. His new book "Europe in Question – and what to do about it" is published as an eBook by Spokesman Press and available on Amazon.