Blog Post

The momentum for Eurobills

What’s at stake: The European discussion towards the establishment of Eurobonds is progressing at a rapid pace as officials have begun focusing on precise interim steps towards the establishment of an eventual full-fledged mutualisation of public debt. Among the current set of concrete proposals, the Eurobills proposal put forward last year by Christian Hellwig, a professor at Toulouse School of Economics, and Thomas Philippon, an associate professor of finance at New York University’s Stern School of Business seems to be getting traction. By limiting its total size (10% of GDP) and maturity (debt of maturity less than a year), Eurobills would avoid creating open-ended commitments. But they would, nonetheless, manage to cover about half of the refinancing needs for 2012. It might well be a good first step and a possible challenge to the more established European Redemption Fund proposal, which remains the most talked about proposal.

By: Date: June 1, 2012 European Macroeconomics & Governance Tags & Topics

What’s at stake: The European discussion towards the establishment of Eurobonds is progressing at a rapid pace as officials have begun focusing on precise interim steps towards the establishment of an eventual full-fledged mutualisation of public debt. Among the current set of concrete proposals, the Eurobills proposal put forward last year by Christian Hellwig, a professor at Toulouse School of Economics, and Thomas Philippon, an associate professor of finance at New York University’s Stern School of Business seems to be getting traction. By limiting its total size (10% of GDP) and maturity (debt of maturity less than a year), Eurobills would avoid creating open-ended commitments. But they would, nonetheless, manage to cover about half of the refinancing needs for 2012. It might well be a good first step and a possible challenge to the more established European Redemption Fund proposal, which remains the most talked about proposal.

Integration Momentum

Peter Spiegel reports that officials have begun focusing on interim steps before getting to full-blown mutualisation of debt, which Berlin has made clear it will not support. Much of the attention thus far has gone to a “wise men” report put out by five German economists last year that would create a “debt redemption fund,” which would refinance debts from eurozone countries over 60 per cent of their gross domestic product. The fund would jointly guarantee the excess debt to help pay it off through cheaper borrowing costs. But in recent weeks, people briefed on internal debates in Frankfurt and Brussels say another incremental idea has caught the interest of EU officialdom: instead of eurozone bonds, the currency bloc should start with eurozone bills, short-term debt backed by all 17 euro members. The idea could gain additional momentum this week when Sylvie Goulard, a French member of the European Parliament, tables a four-step plan where the eurobill proposal is one of a handful of interim steps towards full-scale mutualisation of sovereign debt.

Interviewed by Jean Quatremer, Sylvie Goulard argues that the current paradox is that we more than ever need to borrow in common, but the trust between the northern countries and those in the south has never been lower. The report that the European Parliament prepares imagines a roadmap, aiming at rebuilding confidence between the North and the South, towards the introduction of full-fledged Eurobonds. Given the current state of opinion, Eurobills would be a genuine contribution giving a breath of air to countries that are making efforts while encouraging discipline.

Bloomberg quotes Olivier Blanchard, chief economist at the International Monetary Fund, saying that Eurobills would be “a very good first step” toward common euro-region bonds as they would “very little risk for the participating countries”.

The limits of the European Redemption Fund

Seeking Alpha summarizes the main elements of the idea was developed by the German Council of Economic Experts:

·         National (sovereign) debt up to 60% of GDP continues to be as it is, the national responsibility of individual eurozone member countries

·         The debt above 60% of GDP is pooled into a ‘Redemption Fund’ (ERF) and Euro members have joint liability for the debt placed in the fund.

·         In exchange for that pooling, participating countries enter into payment obligations towards the ERF, calculated that each country would repay its transferred debts within 20-25 years.

·         The countries currently running ‘structural adjustment programs’ (that is, Ireland, Portugal, Greece) can only pool their debt after the successful conclusion of these programs.

And points to some problems associated with this idea:

·         This proposal would do little (actually nothing) for the likes of Greece and Portugal.

·         It commits the other countries to a rather crash course in fiscal adjustment that have never been achieved in history (Italy at 4% of primary surplus for 20 years). Note that even Germany’s debt is way above 60% of GDP (at 82% of GDP) so it obliges even Germany to earmark tax receipts for paying off debt above 60% of GDP.

·         The net effect is, as it stands, likely to be rather contractionary, so in that sense it’s just more of the same austerity, the success of which, to date, is highly questionable to say the least.

The Eurobills proposal

The Eurobills proposal was put forward last year by Christian Hellwig, a professor at Toulouse School of Economics, and Thomas Philippon, an associate professor of finance at New York University’s Stern School of Business.

Christian Hellwig and Thomas Philippon write in VoxEU that issuing Eurobills – i.e. debt of maturities less than a year – up to 10% of Eurozone GDP would help with crisis management as well as financial regulation, and monetary policy, while minimizing the risks of moral hazard. The introduction of Eurobills could provide a large part of the benefits while allowing for significant checks on the risks, both in terms of magnitudes, and in terms of effective control.

To put the numbers into perspective, if Spain, Belgium or Italy were to use their entire quota of Eurobills (10% of GDP), this would cover about half of their refinancing needs for 2012. Thus financial markets would remain an important mechanism to provide price signals and incentives for fiscal discipline on longer dated debt. But at the same time, Eurobills would give them time to implement credible fiscal reforms. In Le Monde, the authors write that a fund of 100 to 200 billion euros would be enough to guarantee the safety Eurobills. Eurobills would allow a country like Italy to save 5 billion a year directly (by lowering short rates), and at least as much indirectly through its stabilizing impact on long rates. This corresponds to the savings generated by the austerity plan of Mario Monti (30 billion savings over three years).

Finally, the commitment is limited and if countries do not behave responsibly, other member state can easily decide to interrupt the program when these bills come due and need to be rolled over.

Because Eurobills are limited in size and in maturity, they do not create open-ended commitments, and they cannot be used to bail out insolvent countries, and therefore would not violate the spirit of the Treaty provision against bailing out member governments.

Euro-standard bills

Bloomberg reports that Princeton’s Brunnermeier questions the credibility of a threat not to allow rollovers. Would the authority really kick out a country that was breaking the rules? Brunnermeier also questions whether Eurobills tackle the real issues, which he defines as the flight to safety that has sent capital pouring out of the peripheral nations and into the core, the issue of transfers in the other direction, and what he calls “the diabolic loop” of banks and sovereigns propping each other up.

Hans Christian Müller writes at Handelblog that the proposal put forward by the European Economic Advisory Group of the CESifo also relies on short-term bonds. But unlike Hellwig and Philippon the responsibility for servicing the standardized bills issued would not be common.

The CESifo provides more details on this alternative idea that doesn’t rely on joint and several guarantee of the bills but rather on their de facto senior status. Each country issues short-term treasury bills satisfying strict common standards, which are to be jointly supervised, so as to share the same risk profile. These bills would be collateralized with future tax revenue or real estate and standardized. Although each state would still retain full responsibility for servicing its own debt, in the new regime these nationally differentiated bills with strict common standards would trade within a few points from each other. Governments would be committed to service them in full, before ordinary government bonds could be serviced. Euro-standard bills provide no vehicle for creating a cap on interest rates to stem an expectations-driven crisis. But their introduction could nonetheless favor the process of rebuilding policy credibility that in some European countries, most notably Italy, has primarily affected the interest rates paid on debt instruments with short maturity. It could also be combined with other schemes, and eventually ease the transition to forms of closer fiscal integration.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Blog Post

Silvia Merler

The economic effects of migration

What’s at stake: migration is currently a very hot topic in both the US and the EU. Immigration issues have come to the forefront due to the problem of rapidly ageing populations, the refugee crisis, and growing anti-immigration political rhetoric. But what do we know about the economic effects of migration?

By: Silvia Merler Topic: European Macroeconomics & Governance Date: January 16, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

Compensating the “losers” of globalisation

What’s at stake: According to some, 2016’s political turmoil shows that the so-called “losers” of globalisation are striking back. There is, however, little agreement on how government should respond to this challenge.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: January 9, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

2016: The end

What’s at stake: 2016 is coming to an end. It will be remembered as an annus mirabilis and horribilis, at the same time. 2016 brought us some previously unthinkable political shocks, and admittedly took away some of our finest musicians. It also couldn’t help taking away Willy Wonka and Princess Leia, making this a much sadder Galaxy. This raises an obvious question: what are we in for, in 2017?

By: Silvia Merler Topic: European Macroeconomics & Governance Date: December 31, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The American dream

What’s at stake: historian James Truslow Adams, in his 1931 book The Epic of America, stated that the American dream is "that dream of a land in which life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement”. Few ideas have ever been as powerful as the “American Dream”, and many recent political events hinge on the fear that this “dream” may be dead. Meanwhile, researchers have been trying to measure the reality behind the dream.

By: Silvia Merler Topic: Global Economics & Governance Date: December 19, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The political economy of macroprudential policy

What’s at stake: the emergence of renewed interest in macroprudential policy has characterised the aftermath of the great recession. There is not yet full agreement on what the tasks of macroprudential policy is or how it should be carried out, but there is a clear understanding that there is an important political economy dimension to it. We review some of the recent contribution on this.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: December 12, 2016
Read article More on this topic More by this author

Blog Post

Pia Hüttl

Macroeconomics in the crossfire (again)

What’s at stake: After a first go at macroeconomics and its flaws a year ago, Paul Romer kicked off the debate again with a recent essay on how macroeconomics has gone backwards. The way that this debate, along with the debate of the role of economics in general, feeds into today's election woes, has also attracted attention in the blogosphere.

By: Pia Hüttl Topic: European Macroeconomics & Governance Date: December 5, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

The Italian referendum

What’s at stake: on 4 December, Italy will hold a referendum on a proposed constitutional reform approved by Parliament in April. The reform, which was designed in tandem with a new electoral law, aims to overcome Italy’s “perfect bicameralism” by changing the structure and role of the Italian Senate. It also changes the distribution of competences between the state and regions. After the shocks of Brexit and the US election, polls are now drifting towards a defeat of the government’s position in Italy.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 28, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Trumpocalypse now: first reactions

What’s at stake: this question should probably be re-formulated as “what’s NOT at stake?” On Tuesday 8 November, the US elected Donald Trump as its next President. Several aspects of Trump’s political and economic agenda appear extreme (we have previously focused on his stance on trade). After the initial shock, we review economists’ opinions on what has happened and what may happen. We will be coming back to this topic regularly.

By: Silvia Merler Topic: Global Economics & Governance Date: November 21, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Brexit and the law

What’s at stake: last week, the UK High Court ruled that the triggering of Article 50 - and therefore the Brexit process - should involve the UK Parliament. The Government will appeal the decision but this has created a new wave of uncertainty about the timing of Brexit, and on what this involvement can mean in practice. We review the different opinions.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: November 14, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Monetary policy at the time of elections

What’s at stake: At this week’s meeting, the Federal Reserve left interest rates unchanged. While this was largely expected, the economic blogosphere has been discussing whether and to what extent this is linked to the election, and what can be expected for the future.

By: Silvia Merler Topic: Global Economics & Governance Date: November 7, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Should we rethink fiscal policy?

What’s at stake: there has been quite some discussion recently on whether we should rethink the framework of fiscal policy in order to make it more appropriate and effective in a world where demand seems to be chronically anemic, inflation is low and the interest rates are likely to stay close to zero (if not negative) for a long time. According to some of the authors, in the Eurozone these concerns are particularly pressing.

By: Silvia Merler Topic: Global Economics & Governance Date: October 24, 2016
Read article More on this topic More by this author

Blog Post

Silvia Merler

Brexit, the pound and the UK current account

What’s at stake: UK PM Theresa May announced the intention to trigger article 50 by March 2017, the Pound Sterling crashed, and a dispute among Tesco and Unilever has resulted in Marmite shortage. Brexit means Brexit, and it continues to be highly discussed. It would be impossible to summarise all the economic blogosphere on Brexit. Our aim is to periodically update our readers on selected important aspects of what promises to be a long-lived topic of discussion. This time we are looking at economists’ view on the Pound crash and the UK current account.

By: Silvia Merler Date: October 17, 2016
Load more posts