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13 September 2017

“Eurobills” as a Safe Asset that blends Fiscal Rules progressively with Market Discipline

Graham Bishop's response to the European Commission Reflections on Deepening EMU.

Summary and Conclusion

  • The electoral calendar of EU27: a rare period of stability seems to lie ahead.  After the French Presidential/Parliamentary elections and the strong likelihood of a fourth term for Chancellor Merkel, EU27’s politicians have reason to feel that anti-EU populist surge has passed its peak.  
  • The economy is now in its fourth year of expansion– providing space for visionary ideas to re-appear from the shadows.  The policy prescriptions of the 2015 Five Presidents Report are now being discussed with a view to implementation during its `Stage 2’ – by 2025.  A grand bargain of major economic reform in France – if carried through – should be met with some positive German support for deeper financial integration in the Eurozone as the riskiness of integration declines – from both governments and banks.
  • The European Commission’s Reflection Paper on deepening the EMU laid out possible actions for further analysis and the economic rationale was analysed in greater depth in a Vox paper[1].
  • The principles required for progress in deepening EMU are clear and include:

o   No mutualisation of debts;

o   Respect for the post-crisis economic governance system (Maastricht 2.0);

o   A proper role for market discipline;

o   “Safe asset” to reduce the `doom loop’ between banks and their government;

o   Financial solidarity with states that respect the rules yet lose market access.

My plan for a Temporary Eurobill Fund (TEF) satisfies these principles. There should now be further [2] examination of its mechanics as the TEF would be a “concrete achievement”.

The purpose of this paper is to consider what `nuts and bolts’ could be fixed – simply and quickly - in the `engine room’ to assist the overall policy objectives – set out in the Appendix.  But these mechanisms should be framed in the context of Schuman’s celebrated 1950 dictum ‘Europe will not be made all at once, or according to a single plan.  It will be built through concrete achievements which first create a de facto solidarity.’ 

Graham Bishop’s Plan for a Temporary Eurobill Fund (TEF) could be a modest, first step along this road by building trust amongst states and with citizens:

  • Participating states would borrow from the Fund – at their own risk – for up to two years.
  • The legal format would follow the tried and tested template of the ESM but would NOT require a change to the TFEU.
  • The costs would be minimal and the TEF could be functioning before the 2019 EP elections – as the ECB winds down its QE purchases of sovereign debt amidst rising interest rates.

However, it is clear that some outcomes must be avoided, as they will be unacceptable in major states such as Germany and France.  In particular, anything that results in the €3 trillion annual output of the German economy taking on a `joint and several liability’ –“mutualisation” - for €8 trillion of Eurozone public debt is manifestly impossible.  That would be equally unacceptable to France with its €2 trillion economy, and markets would regard any such guarantees from smaller economies as utterly implausible.


[1] Buti, Deroose, Leandro and Giudice – July 2017

[2]This plan was examined by a European Commission Expert Group that included this author, and published its final report in March 2014.

Full paper available for consultancy clients here

© Graham Bishop

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