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Any new structure must win the confidence of voters and investors alike. It should also acknowledge the real monetary risks of the European Central Bank being coerced into acting as a sovereign lender of last resort for the entire region. Such a structure should therefore be based on clearly delineated responsibilities for monetary, fiscal and funding policy. These three policy pillars would underpin the eurozone’s fiscal union, allowing Member States to maintain national sovereignty over taxation and expenditure (provided their debt positions and related annual deficits remained sustainable), while benefiting from the efficiencies of common bond issuance.
The ECB would fulfil the first of these roles, with independent responsibility for safeguarding monetary, financial and price stability within the eurozone. As such it would act as the lender of last resort only to the eurozone banking system, not to sovereigns.
A newly-created European Monetary Fund would form the second pillar. It would be responsible for safeguarding medium-term debt sustainabillty and would oversee the fiscal union, by assessing Member States’ economic and fiscal performance; providing support programmes; and policing reform and adjustment programmes.
The third pillar would be a European debt agency, which would be the sole issuer of eurozone sovereign debt, with responsibility for financing all the eurozone’s Member States.
This three pillar structure would produce three tangible benefits. It would give Member States more time to implement fiscal and economic reform and adjustment programmes, without the distraction of short-term volatility in sovereign bond markets. It would provide the EU banking system with stable collateral and more time to prepare for a potential restructuring of legacy debt. Finally, it would provide eurozone Member States with a uniform, low and stable cost of capital – crucial to support economic growth during this period of fiscal adjustment and austerity.
The views expressed here are personal to the author.
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