Eurobonds are necessary to anchor macroeconomic stability and provide a safe way out of the coronavirus storm.
The sharp increase in sovereign bond spreads against the backdrop of the escalating Covid-19 crisis in mid-March was a clear reminder of the vulnerabilities of the eurozone. Within a few days, the spread between Italian and German 10-year sovereign bonds reached 2.8 percentage points, while the Greek spread jumped to 4.1 points.
In times of crisis like this, sovereign debt is of crucial importance as a secure asset. Due to their countercyclical price movement, sovereign sovereign bonds serve as an anchor for macroeconomic stability. In the event of an economic slowdown or after an exogenous shock, a flight to security increases the price of these bonds, simultaneously reducing their yield. Falling financing costs increase fiscal space, while the higher price improves the balance sheets of the banking system.
If, however, government bonds are not seen as a safe asset – because investors expect payment difficulties or even default – an exogenous shock such as the coronavirus can lead to leakage of funds. capital of the respective sovereign debt, thereby increasing the financing costs and fueling the financial “fatal loop” between the banks and the State.
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One wonders if the President of the European Central Bank, Christine Lagarde, acted wisely when she said that “we are not here to close the gaps … there are other actors to really deal with these Questions”. However, despite the unfortunate moment, she raised a valid point: it was the responsibility of governments in 2010 to dispel fears of a Greek default and it is up to them to recover from each other in today’s crisis. Similarly, Lagarde called on governments in the eurozone to act and issue Eurobonds, a request also made by groups of economists on March 20 and 21, as well as by nine of the 19 governments. in the eurozone on March 26.
By implementing the € 750 billion emergency purchasing program in the event of a pandemic – likely to be enlarged and exempt from the conditionality attached to direct monetary transactions – the ECB has once again taken up the challenge and eliminated the immediate need for governments to act. The crisis is dramatic, however, and governments must quickly announce stimulus packages to stabilize expectations, in addition to funding immediate current spending. The issuance of mutually guaranteed bonds would signify their determination to overcome this crisis together and to dissuade expectations of austerity, once the immediate problems of foreclosure are gone.
Unfortunately, the window of opportunity to constructively address the dual problem of high public debt in some euro area countries and the lack of secure assets in the euro area as a whole has closed for the time being. However, proposals for securities backed by sovereign bonds (from CERS, Bénassy-Quéré et al and Theobald and Tober), capitalized electronic bonds, purple bonds and a debt repayment fund (previously from the German Council of Economic Experts and Parello and Visco) provide useful guidance for the mutual issuance of sovereign bonds from the eurozone.
In the current emergency, we recommend that the ECB play an important role as an institution which has proven to be the most functional at European level and already holds a large portfolio of sovereign bonds which can be transformed into bonds of the zone euro. In any event, conditionality in the form of pro-cyclical austerity measures should be avoided.
This flaw in the European Stability Mechanism (MES) programs in the euro crisis is looming again. The proposals under consideration only provide for a derogation from cross-compliance for a very limited volume of MES loans.
Our proposal calls for the introduction of Eurobonds (“your bonds”) and Eurobills representing 20% of the euro area’s gross domestic product, as follows. The Eurosystem – the ECB and the national central banks of the euro area – uses its existing portfolio of sovereign bonds to create sovereign bond securities (EUR bonds). It would do so at the request of the governments of the euro area and in its capacity as tax agent, just as the Federal Reserve Bank of New York helps the American government to issue and auction its treasury bills and its bonds.
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At the same time, governments issue national bonds amounting to 20% of domestic GDP. The ECB then issues EUR bonds and buys national sovereign debt on the secondary market to replace the EUR securities sold, as it would when the securities mature.
Unlike securities backed by sovereign bonds or European secure bonds, EUR bonds are not issued in different tranches with varying risk characteristics. There is no formal guarantee, although implicit, and a long treaty change is not necessary.
Governments simply accept, in this time of crisis, to ask the ECB to group their bonds into EUR bonds as a signal and instrument of solidarity, unity and determination. The ECB could even buy these bonds on the secondary market as part of its buying program. Ideally, however, EUR bonds would be bought by banks and other investors as safe assets, while the ECB would focus its buying programs on eliminating any sovereign yield spread that might persist, despite signals from eurozone governments by issuing debt together. .
EUR bonds are created by combining euro zone sovereign bonds in the same proportion as national subscriptions to the capital of the ECB. Thus, a bond in EUR with a nominal value of € 1,000 is backed by € 264 of German sovereign debt, € 204 of French, € 170 of Italian, € 120 of Spanish, etc.
The risks of default – and therefore of moral hazard – will be all the greater as the governments of the euro zone wait to act in unison and present a common front to the financial markets, as well as a unity for the citizens. Taking the example of Italy, even a sovereign yield spread of only 2 percentage points alone would add 7 billion euros per year to Italy’s financial burden if the debt ratio increased by 20 points percentage.
In the medium term, the debt ratios of all the countries in the euro zone must converge to allow a large market for secure assets, which stabilizes the zone and strengthens the international role of the euro. Countries with the highest public debt ratios need stronger growth, supported by active European policy instruments, such as a European unemployment reinsurance scheme, revenue-side consolidation in the form of levies on capital and more transparent, strict and growth-friendly budget rules.
In the short term, decisive action is needed to enable the economy of all parts of the euro area to recover from the viral shock and, as far as possible, to foster the structural transformation necessary to stop global warming.