Follow Us

Follow us on Twitter  Follow us on LinkedIn
 

02 December 2011

Citywire: Merkel's fiscal union - is a short-term eurobond a long-term answer? (feat. ELEC proposal)


The week ends in the eurozone with hope that the next will bring some peace. As the area looks to be coming to an agreement on a fiscal union, a think tank older than the Maastricht treaty has proposed a short-term EMU bond fund.

The paper sets out a framework for a short-term fund that aims to bring down the borrowing costs of eurozone countries in the search for a common fiscal solution[1]. The think tank proposes that only after a state’s economic policies are approved by the European body of financial ministers, ECOFIN, would the state be invited to pool their short-term debt. The fund itself would only last four years. States could issue debt with a maximum of two years maturity through the fund.

"We have started with the assumption that Greece will not be in the position to take part in the fund. The whole idea is to remove the distinction between Germany and those like Italy and Spain who are not in immediate distress", says Graham Bishop, who manages his own London-based consultancy firm on European financial regulation and coordinated the writing of the report.

"If we see a treaty change of the type Merkel referred to this morning, we will need a good three years before we can see this enforced. This fund would act like a bridge to make sure that countries like Italy can refinance themselves until then."

The positives of the outlined plan by the think tank are compelling, mainly because alternatives remain few and far between. Investors would have the equal ‘guarantee’ that both German and Italian two-year debt would be repaid. Europe’s policy-makers would have more time to get their act together and redefine the euro area to address its current challenges.

Yet there are also high risks. Key is whether markets would interpret this as a step towards a longer-term eurobond or just another cover-up to ever-widening competitiveness in the area. What would the market need to see as ‘guarantees’? And, even if guarantees were fully trusted by the market, it is not sure who the market is willing to see as Europe's 'core' and not? How far would economic policies approved by ECOFIN have to go?

What the plan does is combine the need for common fiscal action and policing in the euro area with a structure to bring down debt costs for those most rapididly losing credibility.  More importantly, it brings out the fiscal knife in more fiercely dividing between the ‘cans and the cannots’.

This is one more plea from the outside to get euro area politicians to accept that a ‘common currency area’ needs to shift from a free internal market to its own IMF-styled authoritarianism. Those who want (or can) play along will be decisively cut from those who can’t. If Merkel's plan follows anything of the plan proposed by the think tank, euro area's borders look to be recarved - and sooner than perhaps many thought.

Full article

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



© Citywire


< Next Previous >
Key
 Hover over the blue highlighted text to view the acronym meaning
Hover over these icons for more information



Add new comment