Bini-Smaghi L., M. Marcussen, (2018), “Delivering a safe asset for the euro area: A proposal for a Purple bond transition”, Vox EU, 20 July
Eurobonds are today politically unfeasible…
Genuine Eurobonds with joint and several liability would bring significant benefits and stability to the euro area. Top of this list is credibility, further cementing that the euro is here to stay. Such an instrument would also price counter-cyclically as investors seek refuge herein during periods of market stress, just as we observe for US Treasuries today. This countercyclical property is important also for systemically important institutions, such as banks. The ECB would, furthermore, be able make ‘unlimited’ purchases of genuine Eurobonds for monetary policy purposes. A deep and liquid Eurobond yield curve would, moreover, offer a pricing reference for other financial assets and thus support the development of Europe’s Capital Markets Union. Genuine Eurobonds, however, do not appear to be politically feasible in the foreseeable future.
…but the status quo leaves the euro area vulnerable
At the same time, the status quo leaves the euro area highly vulnerable in the event of a major shock. The European Stability Mechanism (ESM) with potential support from Outright Monetary Transactions (OMT) are certainly welcome additions to the euro area’s crisis management toolbox. To avoid moral hazard, the ESM Treaty leaves the door open to private sector involvement (i.e. debt restructuring) for the sovereign debt of any member states that applies for an ESM programme. Our concern, however, is that in doing so the ESM Treaty creates a situation that could amplify stress in crisis. If market participants see a high probability that a member state will apply for an ESM programme, then the perceived risk of debt restructuring will likely increase. Experience shows, that when markets place a high probability on debt restructuring, governments often lose market access. While the ECB can purchase on secondary markets, the European Court of Justice (2015) has made it clear that “the purchase of government bonds on secondary markets must not have an effect equivalent to that of a direct purchase of such bonds on the primary market”. We thus deem it unlikely that the OMT could be used to restore market access for governments. Indeed, as highlighted by Wolff (2018), the issue of debt restructuring is often treated all too lightly.
- Macchiarelli, C. & Monti, M., (2018), «The EMU quest for integration: What does the ECB’s collateral data tell us?», LSE EUROPP, July
- Daniel Gros, (2018), «Convergence in the European Union: Inside and outside the euro», CEPS, 27 April