16 June 2023

ELEC/Robert Triffin seminar: Bishop on past and present ELEC proposals for euro-denominated `safe assets’ and the acceleration of the Capit

The internationalisation of the euro and the creation of the Capital Markets Union in the EU

Seminar organised by the Robert Triffin Foundation and European League for European Co-operation (ELEC)

Comments by Graham Bishop

Paris, 16 June 2023

I'm delighted to be speaking at this seminar as my role today is to give an overview of the past and present ELEC proposals for euro-denominated `safe assets’ and the acceleration of the Capital Markets Union (CMU).

By way of background, I should make it clear that the latter part of my career was at Salomon Brothers for about 20 years. So, I was a `bond market vigilante’ rather than an academic or a policy maker.

I'm going to talk about ELEC’s contribution to European thinking about how to protect the euro in the midst of the existential crisis of 2010. That sounds a long time ago now, but it's still very firmly etched into my mind. At that stage, spreads over German government Bunds for systemically important countries -such as Italy - had blown out to levels where the cost of the public debt had reached the point that it was plainly unsustainable in the longer term.

Last night, many of us were at a session with former Governor of the Bank of France, Jaques de Larosière. He gave us a master class on the perils of high debt levels. However, the theory he espoused last night was actually turning into reality 10 years ago. Markets participants were looking up the redemption dates of major bond issues and discussing whether those issues could be rolled over at their imminent maturity. That rollover risk is at the very epicentre of any debt crisis.

Given ELEC’s historic mission, Wim Boonstra (then chief economist of Rabobank and chair of the Monetary Commission) realised we had many leading financial market participants in our group. Accordingly, in 2010, he summoned us to a meeting in Utrecht to brainstorm possible solutions. Such ideas could only come from the private sector as they would never get off the ground within the official sector.

This was a group of central bankers, commercial bank economists, academics, lawyers, politicians and the recently retired treasurer of the European Investment Bank (EIB). We had two or three brainstorming sessions and came up with a very good idea.

Figure 2: December 2011:  Proposal for an “EMU Bond Fund”

This work was started before the European Financial Stability Fund (EFSF) was launched in 2010 and of course, well before ECB President Draghi's famous commitment in July 2012 to “do whatever it takes” and the European Stability Mechanism (ESM) commencement of operations in September 2012.

The urgent need in 2010 was to deal with the looming `rollover risk’ -particularly for Italy. Hence the idea of lending by the fund for only two years as that would give a borrowing state enough time to take corrective measures.

 I'm not going to go through all the details in Figure 2 (above) but just highlight two points of difficulty.

Ø First, the guarantee. Our soundings produced a clear answer: Only joint and several guarantees would be acceptable to the market. But Germany was implacably opposed to that, and I can easily understand why. A €3 trillion annual GDP could not be a credible backstop for the €9 trillion government bond market of the euro area.

Ø Secondly, the disciplinary effect of interest surcharges for the worst offenders was intellectually obvious - but would never be accepted politically. Then Mario Draghi announced the ECB would “do whatever it takes” in July 2012 and the ESM was born. The crisis abated but the cracks were simply papered over for the short term.  

After this phase, I took it upon myself to think through some of the difficulties and develop the idea further. The ECON Committee of the European Parliament quite liked the idea and pushed – in reality, forced - the European Commission to set up an Expert Group to examine the Eurobill Fund concept, as well as other ideas. European Commission President Barroso appointed me to this Expert Group in 2013. But our report was mysteriously delayed until the moment of Parliament's dissolution in 2014.

Figure 3: Basic Features of the Temporary Eurobill Fund (TEF)

(Links:  Commission Expert Group  Presentation to ECON – 2014   Summary)    

The final version of my thinking is summarised in Figure 3 (above) and took into account what I had learned in the Expert Group. I will not go through it all but just make 4 points.

Ø First: temporary. It was key that the fund would run off quickly if it did not go well as at least 6 Member States had constitutional requirements regarding long term control over public spending.

Ø Second: up to two years maturity. That short maturity enabled the issues to be labelled as `bills’ thereby avoiding the toxic term `Eurobonds’.

Ø Third: There would be no need to change the Treaty on the Functioning of the European Union (TFEU). A simple intergovernmental treaty could do it.

Ø Fourth: size. It could well reach about half the size of the US Treasury Bill market and individual issues could well rival the US counterpart. So that would boost the international role of the euro, in addition to many other benefits.

Figure 4: Current relevance of these concepts

For my concluding remarks, I now turn to the future for ELEC in reasserting its role as a private `think tank’. Under the guidance of our president – Javier Arias – the Group of Wise Persons (GWP) had a first meeting at the Netherlands Bank in Amsterdam. This successor to the Monetary Commission will meet again in October in Brussels. The spread of the membership of this group is even more impressive than that of the 2010 group.

Does the concept of euro bills still have any relevance that might be studied by this group? The intention always included a boost to capital markets and the political world still thinks that it is an essential complement to the banking system. As the market sees it, EU banks as a whole are incapable of funding economic revival. They still trade at about 60% of book value, perhaps half the rating of U.S. banks.

Considering the current relevance:

Ø Firstly, `safe assets’ for banks remain necessary to minimise the `doom loop’ – the relationship between the bank and its host country. This is still a problem.

Ø Secondly, the relative size with US markets: This remains the key to the international role of the euro. The Eurobill fund must be the basis for the short end of a euro yield curve that could compete with the liquidity of U.S. Treasury bills.

Ø Thirdly and sadly: ECB data on bank loans to non-financial corporates shows that bank lending was only up 4% in April, and lending to households was only up 2%. So that's a significant decline in real terms - hardly the basis for a strong economic revival based on bank finance. Capital market finance is the only alternative.

Ø Finally, there's the question of a store of value. I believe there is more questioning around the EU of the need for a euro central bank digital currency (CBDC) as bank-based payment systems improve. Soon, there will be instant payments available throughout the euro area. For anti-money laundering purposes, it is banks that already “know your customer” (KYC) for their clients. So what would a euro CBDC add to a citizen who wants a `safe asset’ in addition to instant payments? A key part of the Retail Investment Strategy is to persuade EU savers to put their money into mutual funds. What could be a better first step than a highly liquid asset, collectively guaranteed by all the euro area governments?

In my view, the concept of a eurobill fund remains extremely relevant to current circumstances.

Thank you for your attention.

*****

We are pleased to communicate that all the available contents of the Paris events of last June 15th and 16th are now available on our website www.triffininternational.eu :

  Triffin Lecture - June 15th 2023
At this page, you can find the video of the Lecture by Jacques de Larosière and a selection of photos of the event.

RTI/ELEC Conference on "The internationalization of the euro and the creation of the EU Capital Markets Union"
At this page, you will find the Summing-up of the Conference and all the power point presentations (downloadable).

© ELEC