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What is the Temporary Eurobill Fund (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. (More explanation in my most recent technical paper)
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”
The European Stability Mechanism (ESM) is a key element in the design of the TEF[1]
If a TEF participant does eventually decide to default on its public debt, then a key part of the TEF design is that the state’s obligations to the TEF will be redeemed as they fall due out of the proceeds of an ESM programme for that state. Accordingly, no state should have greater obligations to the TEF than the ESM’s remaining lending capacity[2]. This rule will ensure that the creation of the TEF will not increase the liability of its members beyond their existing commitment to the ESM. Therefore the strength of the ESM is a vital back-stop to the TEF and any move to enhance its capability by converting it to a European Monetary Fund is welcome.
[1]Most recent technical paper “Response to Commission Reflections on Deepening EMU: “Eurobills” as a Safe Asset that blends Fiscal Rules progressively with Market Discipline”.
[2]If market yields are signalling that more than one state is at risk, then the total exposure of all these states should be limited to the ESM’s capacity. (What trigger for a signal from market yields? Perhaps the Treaty of Maastricht admission rule (Article 4 Protocol) that 10-year yields should not be more than 2 percentage points above the average of the three lowest inflation states.)
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