19 December 2017

Completing Banking Union: Eurobills as an Easy Step

If the EU wishes to take a small step that can be done swiftly, and without changing the TFEU, then my plan for a Temporary Eurobill Fund could even be implemented before the 2019 European Parliament elections.

As 2017 ends on a high note for economic activity, EU leaders have continued to call for the completion of banking union – a welcome decision to mend the roof while the sun is shining, rather than in the middle of the storm. However, there are many large and complex issues to be resolved to bring banking union to full fruition and the desired timescale is short.

If the EU wishes to take a small step that can be done swiftly, and without changing the TFEU, then my plan for a Temporary Eurobill Fund (more below) could even be implemented before the 2019 European Parliament elections. It would make a significant contribution to banking union by providing a “safe asset” to banks, thereby sharply cutting the `doom loop’ between banks and their sovereigns, thus directly reducing the riskiness of banks. The indirect contribution from enhancing the economic goverence process would be a more fundamental, longer term benefit.

·         Council President Tusk stated after the 14/15 Dec Summit that “The summit participants agreed with my proposal that in the next 6 months, the work of our finance ministers should concentrate on areas where the convergence of views is the greatest. Progressing step-by-step on issues such as the completion of the Banking Union should significantly strengthen the resilience of the EMU…. I will call the next Euro summit already in March to continue this discussion. And June could be the moment for us to take the first decisions.”

·         This Eurozone commitment reflected the Joint Declaration on the EU's legislative priorities for 2018- 2019  “The three Institutions agree to deliver a positive agenda for a more inclusive and more united EU we will give priority treatment in the legislative process to the following initiatives to ensure substantial progress and, where possible, delivery before the European elections of 2019 ….3  by pursuing efforts to deepen our Economic and Monetary Union, and by completing our Banking Union in a way that balances risk sharing and risk reduction;”

What is the Temporary Eurobill Fund[1] (TEF)?

The TEF is a simple “plainest of plain vanilla” plan for a common institution to purchase the under-two year debt issuance of participating states. The institution would finance such purchases by issuing its own bills - matching its assets in overall volume and maturity. The TEF’s legal structure would replicate the ESM. The TEF is a replacement of existing debt, rather than a mechanism to increase debt. Indeed, by fostering better economic policies, it should encourage further falls in public indebtedness. 

However, the political implications go far beyond a simple financial institution because the TEF - to paraphrase Monnet’s words – “fuses the interests of the Eurozone peoples” into a vital component of the Eurozone financial system, rather than seeking to balance national interests. That system needs a European-level “safe asset” to replace its existing holdings of a hotchpotch of national instruments that came perilously close to dis-integration in the heat of the Great Financial Crash.

The time is now ripe to begin implementing Schuman’s dictum: take some “concrete steps... to achieve de facto solidarity”