Building Europe's secure anchor requires significant investment and effort: a reality check.
In the realm of European finance, a significant debate is underway regarding the creation of a European safe asset (ESA). This asset, if successfully implemented, could serve as a stable store of value for investors within the EU and globally, bolstering the euro's status as a major global currency.
The proposal by economists Olivier Blanchard and Ángel Ubide outlines a vision for the ESA that emphasises deeper economic integration, fiscal convergence, and robust governance frameworks. To ensure credible repayment and address fiscal sustainability concerns, their approach includes several key elements.
Firstly, the integration and fiscal convergence of the euro area is highlighted as crucial. This includes the advancement of the Capital Markets Union, the completion of the banking union, and progress towards closer alignment of fiscal positions among euro area countries. These steps are designed to minimise asymmetric fiscal risks across members, fostering stronger fiscal credibility.
Secondly, the proposal emphasises joint issuance underpinned by sound fiscal policies. The ESA would be supported by robust fiscal frameworks and oversight, ensuring that the joint debt issuance is backed by credible fiscal commitments of participating countries, thereby reducing doubts about repayment capacity.
Lessons from existing mechanisms like the Recovery and Resilience Facility (RRF) provide a framework that can help establish clear fiscal rules and governance structures, supporting the credibility of the safe asset and helping maintain fiscal sustainability across member states.
A European safe asset would foster stronger global demand for euro-denominated assets, enhancing liquidity and making the asset a genuine "safe haven" comparable to US Treasuries. This would implicitly strengthen repayment credibility.
However, it's important to note that some Eurobond proposals understate the importance of solvency and fiscal backing. The euro area is seen as having a strategic opportunity to develop its own safe asset due to growing doubts about US Treasuries. However, safe debt must be repaid, requiring either the creation of new European Union-level revenues or a lasting reallocation of national fiscal capacity.
The establishment of a European safe asset is a long-term political and fiscal commitment. It is not just a technocratic fix; it requires building institutions capable of enforcing repayment, ensuring fiscal discipline, and commanding public trust. One proposal suggests replacing national debt with 'blue bonds', which would be perpetually rolled over via new issuance, relying on value-added taxes for interest payments.
The challenge lies in turning economic logic into durable institutional design. Fiscal trade-offs cannot be ignored in the creation of a European safe asset. For instance, a reallocation of investor demand towards the common instrument could increase borrowing costs for national sovereigns with weaker credit profiles.
Economists and policy-makers are calling for the establishment of a deep and liquid Eurobond market. A European safe asset can only succeed if it is embedded in a broader framework of fiscal responsibility, credible repayment structures, and clearly defined rules. The necessity of a permanent European safe asset is not in question, but the delivery of it on acceptable terms is.
In summary, the proposal aims to link the creation of the European safe asset with deeper economic integration, fiscal convergence, credible governance frameworks, and active use of existing successful euro area mechanisms. These combined efforts intend to ensure the asset’s repayment credibility and address fiscal sustainability concerns effectively. The establishment of a European safe asset is a complex, long-term commitment that requires careful consideration and a unified vision for Europe's financial instruments.
- The economists' proposal for the European safe asset (ESA) advocates for a stronger emphasis on deeper economic integration and fiscal convergence.
- To establish credible repayment, the ESA's approach includes the advancement of the Capital Markets Union, the completion of the banking union, and progress towards closer fiscal alignment among euro area countries.
- Joint issuance of the ESA would be backed by robust fiscal frameworks and oversight, ensuring credible fiscal commitments from participating countries.
- Lessons from existing mechanisms like the Recovery and Resilience Facility (RRF) can help establish clear fiscal rules and governance structures for the ESA.
- The European safe asset would foster stronger global demand for euro-denominated assets, enhancing liquidity and making it a potential "safe haven" comparable to US Treasuries.
- However, the repayment of a European safe asset requires either the creation of new European Union-level revenues or a lasting reallocation of national fiscal capacity.
- The establishment of a European safe asset necessitates a unified vision for Europe's financial instruments, with a focus on building institutions capable of enforcing repayment, ensuring fiscal discipline, and commanding public trust.
