Guest column: the idea of a European Debt Agency

 

5/3/2010

Guest column in the Financial Times Deutschland

The idea of a European Debt Agency

Recent tensions on the market for sovereign euro debt point to the problems of a monetary union without a common economic government. Diverging competitiveness lead to internal imbalances and doubts by the financial markets about solvency of some countries. Because a fully fledged economic government was not feasible at the start of the Eurozone, the provisionary answer was the Stability and Growth Pact. I propose to take a step forward and to create a common Eurozone treasury or a European Debt Agency.

The EDA would be an EU institution in charge of issuing and managing the government debt of the Eurozone. The EDA would be under the authority of the Ministers of Finance of the Eurogroup and the ECB. The European Investment Bank would act as the secretariat of the EDA. The EDA would take over the existing debt titles and it would issue new ones as far as agreed by ECOFIN and Eurogroup. These funds would be transferred to the member states. As far as the existing debt is concerned the EDA would differentiate among debtors and each member state would continue to pay different interest rates reflecting its credit rating. New issues would benefit from a uniform interest rate. As old debt matures and is replaced by new titles, the Eurozone government debt would become a unified debt, implying that each member state implicitly guarantees the debt of all others.

The advantages of the creation of such an EDA would be several.

First, the EDA would be an instrument to improve the enforcement of the Stability and Growth Pact. After an agreement on the deficit target of a member state at the level of the Eurogroup and the ECOFIN, the EDA would only borrow and lend as much as the agreed deficit. If the country concerned would not respect its commitment under the Pact, it would face the daunting task to finance itself at the capital market, where it would face higher interest rates due to the perceived higher risk profile resulting from the non respect of the Pact. This would result in a real penalty for non respect of the Pact.

Second, it would allow the creation of a real single European market for government debt. This huge market would result in significant gains in terms of liquidity, generating benefits, not only for lenders but also for governments, as it results in lower real interest rates. The smaller member states, which face most the problem of low liquidity, would benefit most, but also the bigger member states would gain through the lower interest rates.

Third, the EDA would be an important visible political and financial symbol of a unified European government bond market. This, in its turn could improve the role of the euro at the world level, at the moment when major surplus countries are looking for alternatives for their dollar assets.

Fourth, because of the size of the debt it would manage, the EDA could play a certain role in regard to the interest rate structure within the Eurozone and in respect of managing the exchange rate of the major currencies in the world.

One can be even more ambitious and attach two more roles to the EDA: a financing vehicle for trans-European infrastructure projects and an instrument to conduct a countercyclical fiscal policy. This would give the EU budget the true independent “means of action” it currently lacks, while fully taking into account Member Statess fiscal constraints.

We realize that the idea of an EDA would not be shared with the same enthusiasm by each Eurozone member state nor by some of the outsiders. Such an institution would mean the transfer of important national powers to a Community institution.

The EDA runs counter to the principle of ‘no bail out’ enshrined in the Maastricht Treaty. However, even without an EDA, solidarity among member states of the Eurozone may be imposed upon them by the financial markets. Better to control this process and using the EDA to enforce the Stability Programmes.

The idea of a European Debt Agency is an economic as well as a political project for Europe. It pleads for a deeper EU integration on the basis of the major economic success of Europe, the euro. It gives specific answers to typical European questions: which degree of subsidiarity, which level of cohesion and cooperation between Member States and which interinstitutional rules to be applied. In agreement with the tradition of European construction, we would expect the answers to be already known: in the end, as is the case for each new step on the way to a deeper EU integration, it is perceived economic gain combined with political voluntarism.