23 November 2011

A two-year refinancing for all € bill/most bond maturities until 2013: An “EMU Bond Fund” Proposal from ELEC

Executive Summary

(Note: link to full text and Timelines/Scenarios for download is at the foot of the page)

Policy-makers must take the time to explore the “reasonably foreseeable” consequences of proposed actions. They must avoid any that have an obvious and well-known capacity to produce a bad outcome for society within a few years, even if it may alleviate the current pain for a few weeks or months. But we are acutely aware of the relentless pressure of the 24x7 media to fire a “bazooka” in time for the next news bulletin. We reject this short-term approach to policy-making and propose an immediate solution but also manifestly creating a rising tide of benefits in the medium term.

We see the global economic turmoil and note that the eurozone – as an integrated economic entity – seems set to surmount its current difficulties if its members provide a limited amount of mutual support.  The autumn forecasts from the European Commission for 2013 are illuminating:

Our modest proposal is designed to provide a limited degree of mutual support that will be sufficient to allow adequate time to states that are themselves trying to restore their competitiveness. Then they can demonstrate to their creditors that the first fruits of good policies are visible, and that the policies are entrenched into their political structure in a way that limits the risk of sudden reversal.

Our proposal for an “EMU Bond Fund” is:

• After a euro area State’s economic policies have been approved by ECOFIN in the European Semester as both economically effective and politically durable;
• Then all such States should pool their short-term borrowing via a Fund that would only last four years. The Fund would borrow in the markets for, at most, a two year term – to match the borrowing profile of its client States;
• The borrowings of the Fund would enjoy a “guarantee” involving all participating euro area States. We are launching a survey to test the acceptability of different levels of guarantee;
• The fund’s capacity would be large enough to fund for the next two years all the maturing bonds of euro area states that were unable to access the capital markets on normal terms;
• Interest surcharges would be applied to those States that breached the Stability and Growth Pact (SGP);
• States that became subject to sustained SGP sanctions would cease to be eligible to borrow from the Fund in the future.

For more information please see the attached document.