Download publication

Working Paper

State contingent debt as insurance for euro-area sovereigns

Since the financial crisis, EU countries' economies have recovered to the point that they are exiting their adjustment programmes. Institutional stability mechanisms have been improved at the European level, with the promotion of the banking union and the establishment of a European Monetary Fund, for instance. However, the authors argue that such crisis contingencies should include markets in their risk-sharing, which would require better coordination with institutions.

By: and Date: April 26, 2018 Topic: Finance & Financial Regulation

The euro-area sovereign debt crisis is receding. Europe is on a recovery path, growth is broad-based and unemployment is falling. One after the other, countries hit hardest by the crisis are exiting their adjustment programmes. However, debt remains high in most countries and future debt crises should not be ruled out. While the memories are fresh, it is a good time to think about insurance against future shocks. Such insurance schemes must involve risk sharing with the markets. They weaken the bank-sovereign doom loop from the sovereigns’ side, and not just from the banks’ side as pursued by the banking union, and make for a more resilient euro area.

The promotion of the banking union and the establishment of a European Monetary Fund are institution-based solutions to crises. Banking union provides the safety regulations that will make banking institutions more resilient, while the EMF is a ‘fire brigade’ to be called on in emergencies. What has not been tapped are the markets, whose tolerant behaviour to sovereign demands encouraged the built up of debt, while their finicky response exacerbated the crisis.

Taking ongoing G20 discussions on sovereign contingent debt as the point of departure, the authors argue that these instruments could provide market-based insurance to protect the euro area from future debt crises. Risk-sharing with the markets is a constructive way forward in the context of the Franco-German debate on risk-sharing among states versus system-wide risk reduction. The financial innovation of contingent debt is a practical euro-area reform that would not introduce risk-sharing between states or require institutional reforms or Treaty changes. However, coordination would be needed.

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

Opinion

Fiscal rules and the role of the Commission

The proposals on fiscal frameworks and rules in the recent CEPR Policy Insight on euro-area reform showcase the multiple dimensions of the fundamental dilemmas we are confronted with in the governance of the euro area. This column, part of the VoxEU debate on Euro Area Reform, looks at the challenges to the central role of the Commission that have arisen as the rules-based fiscal framework has been severely compromised.

By: Thomas Wieser Topic: European Macroeconomics & Governance Date: May 22, 2018
Read article More on this topic More by this author

Blog Post

Argentina’s troubles

Argentina has abruptly called on the International Monetary Fund for financial help, amid currency pressures. We review recent economists’ position on this.

By: Silvia Merler Topic: Global Economics & Governance Date: May 22, 2018
Read article More on this topic

Blog Post

Completing Europe’s banking union means breaking the bank-sovereign vicious circle

Several euro area leaders, including the German chancellor, her finance minister, and the French president, have recently referred to the need to “complete the banking union.”. These public calls echo those made in more formal settings, and inevitably raise the question of what criteria should be used to assess the banking union’s completeness.

By: Isabel Schnabel and Nicolas Véron Topic: Finance & Financial Regulation Date: May 17, 2018
Read article More by this author

Blog Post

Europe needs a broader discussion of its future

When thinking about what will determine the prosperity and well-being of citizens living in the euro area, five issues are central. This column, part of VoxEU's Euro Area Reform debate, argues that the important CEPR Policy Insight by a team of French and German economists makes an important contribution to two of them, but leaves aside some of the most crucial ones: European public goods, a proper fiscal stance and major national reforms. It also argues that its compromise on sovereign debt appears unbalanced.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: May 4, 2018
Read article More on this topic

Blog Post

Structural Reforms 0.0 – The case for strengthening institutions

Improvement in institutional quality, particularly concerning the rule of law, is the most essential and urgent structural reform the EU can make. Without it, the obtrusive lack of trust in the EU – which has thus far hampered expansionary and reformist efforts – will persist.

By: Maria Demertzis and Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: May 3, 2018
Read article Download PDF More on this topic

Policy Contribution

Making a reality of Europe’s Capital Markets Union

It is high time to make the CMU project real.The authors of this publication suggest that capital markets will only transform with concrete action and that ESMA reform should be a priority but cannot be the only one. Policymakers need to set priorities that will move the project forward.

By: André Sapir, Nicolas Véron and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: April 27, 2018
Read article More on this topic More by this author

Blog Post

Building a stable european deposit insurance scheme

Deposit insurance, like any insurance scheme, raises moral hazard concerns. Such concerns arising from European deposit insurance can be alleviated through a country-specific component in the risk-based premium for deposit insurance and limits on sovereign bond exposures on bank balance sheets. This column argues, however, that proposals to maintain national compartments in a new European Deposit Insurance Scheme are self-defeating, as such compartments can be destabilising in times of crisis.

By: Dirk Schoenmaker Topic: Finance & Financial Regulation Date: April 19, 2018
Read article More on this topic More by this author

Blog Post

The debate on euro-area reform

A paper jointly written by 14 French and German economists set off a debate about the reform of euro-area macroeconomic governance. We review economists’ opinions about it.

By: Silvia Merler Topic: Finance & Financial Regulation Date: April 16, 2018
Read article More on this topic More by this author

Opinion

The Lesser Evil for the Eurozone

For three decades, the consensus within the European Commission and the European Central Bank on the need for market reforms and sound public finances has been strong enough to overcome opposition in small countries and outlast procrastination in large ones. Today, however, the Eurozone playing field has become a battleground.

By: Jean Pisani-Ferry Topic: Finance & Financial Regulation Date: April 4, 2018
Read article More by this author

Podcast

Podcast

Director's Cut: Developing deposit insurance in Europe

In this week’s Director’s Cut of ‘The Sound of Economics’ podcast, Bruegel director Guntram Wolff talks with Nicolas Véron, senior fellow at Bruegel, about the implementation of a European Deposit Insurance Scheme (EDIS), one of the three pillars needed for the completion of banking union.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: April 3, 2018
Read article More on this topic

Blog Post

Do wide-reaching reform programmes foster growth?

With growth gathering momentum in the eurozone, some have claimed this is the proof that structural reforms implemented during the crisis are working, re-opening the long-standing debate on the extent to which reforms contribute to fostering long-term growth. This column employs a novel empirical approach – a modified version of the Synthetic Control Method – to estimate the impact of large reform waves implemented in the past 40 years worldwide.

By: Alessio Terzi and Pasquale Marco Marrazzo Topic: European Macroeconomics & Governance Date: March 28, 2018
Read article More on this topic More by this author

Opinion

Greece must capitalise on its growth momentum

Better-than-expected growth performance reflects the underlying positive changes in the Greek economy – but net investment is in fact negative, while Greece has various institutional weaknesses. Further improvements must be made regarding Greece’s attractiveness to foreign direct investment. A new (at least precautionary) financial assistance programme would improve trust in continued reforms and also address eventual public debt financing difficulties.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: March 26, 2018
Load more posts