Past Event

Does the euro area need a sovereign insolvency mechanism?

The sovereign debt crisis shook the Euro to its foundations. It soon became clear that there was no mechanism to allow a tidy insolvency of a state wishing to remain inside the euro area. To face future crises, does the EU need a sovereign insolvency mechanism?

Date: July 12, 2016, 1:00 pm Topic: European Macroeconomics & Governance

SUmmary

See below for video and event materials.

Lars Feld and Jochen Andritzky of the German Council of Economic Experts (GCEE) presented their proposal on a sovereign debt restructuring mechanism for the euro area. It is embedded in a wider framework called “Maastricht 2.0”, which consists of three pillars: fiscal and economic policy under national responsibility; a financial framework under European responsibility; and a crisis mechanism nested in between the two.

The innovations in their proposal are a two-step timeline for restructuring sovereign debt and a gradual phase-in for the new regime. The two steps proposed for a restructuring are a quasi-automatic maturity extension followed, if necessary, by a deeper restructuring based on a debt sustainability analysis by the European Stability Mechanism (ESM). The gradual phase-in regime includes a new class of sovereign bonds, eligible for restructuring, which could be issued from next year. These would include creditor participation clauses and thereby involve a market-based approach to debt restructuring.

Zsolt Darvas acknowledged the GCEE’s report and endorsed the idea for a debt restructuring mechanism. First, he argued the advantaged of a US system, with no federally imposed fiscal rules, no bail-out, no monetary financing, but redistributive policies. He felt this would be the first best option for Europe, which means it is an optimal yet unfeasible option. Furthermore, Darvas questioned the effectiveness of the current system of fiscal rules, which are still an important element in the GCEE’s proposal. He also had doubts about the practicalities of the proposal, such as whether the quasi-automatic element in the proposal will be effective when creditors still need to give consent (market-based approach), or whether the ESM will be big enough for countries like Italy as the mechanism is conditional on an ESM program.

Guntram Wolff further wondered whether the newly issued, eligible debt can be introduced smoothly, and whether the introduction of a debt restructuring mechanism once more implies that there is no such thing as a risk-free asset. Another topic raised was the difference between market-based and statutory approaches. On this, Lars Feld replied that a statutory approach is unfeasible.

Two major points were raised in the Q&A session. First, is there room for manoeuvre on this topic without treaty change? Second, does the lack of a safe asset make such a sovereign debt restructuring mechanism unstable? On the first point, Lars Feld and Jochen Andritzky argued that there would be need for treaty change, because sovereignty is affected. On the second, they argued that stability can still be provided by single countries’ debt – the issue is rather a matter of distribution than stability. If distributional consequences are not desired, European Safe Bonds (ESBies) are a way to address this issue.

Event notes by Bennet Berger, Research Assistant

VIDEO RECORDING

 

Event materials

Presentation – Jochen Andritzky and Lars Feld

A Mechanism to Regulate Sovereign Debt Restructuring in the Euro Area – Working paper by Jochen Andritzky, Désirée I. Christofzik, Lars P. Feld, Uwe Scheuring

 

Schedule

Jul 12, 2016

12.30-13.00

Check-in and lunch

13.00-13.30

Presentation

Jochen Andritzky, Secretary General, German Council of Economic Advisors

Lars Feld, Member, German Council of Economic Experts

13.30-13.45

Comments

Chair: Guntram B. Wolff, Director

Zsolt Darvas, Senior Fellow

13.45-14.30

Audience discussion

14.30

End

Speakers

Jochen Andritzky

Secretary General, German Council of Economic Advisors

Lars Feld

Member, German Council of Economic Experts

Zsolt Darvas

Senior Fellow

Guntram B. Wolff

Director

Location & Contact

Bruegel, Rue de la Charité 33, 1210 Brussels

Bryn Watkins

Bryn Watkins

bryn.watkins@bruegel.org +32 2 227 42 88

Read article More by this author

Blog Post

Latest data shows developing trends in the European Central Bank’s refinancing operations

The stock of liquidity supplied through the ECB’s open market operations has remained relatively stable, though there is a clearer change in the country composition.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: December 12, 2017
Read article More on this topic More by this author

Blog Post

Sovereign Concentration Charges are the Key to Completing Europe’s Banking Union

The past crisis revealed that most euro-area banks have disproportionate sovereign exposure in their home country. Charging banks for sovereign concentration is one solution to this issue, and would help advance the discussion on banking union.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: December 7, 2017
Read article More on this topic More by this author

Blog Post

The eurozone medley: a collection of recent papers on the future of euro-area governance

Our scholars Grégory Claeys, André Sapir, Dirk Schoenmaker, Nicolas Veron and Guntram B. Wolff, explore the next steps needed to create a more functional and coherent economic governance framework.

By: Bruegel Topic: European Macroeconomics & Governance Date: December 6, 2017
Read article More on this topic More by this author

Opinion

The European Commission should drop its ill-designed idea of a finance minister

Beyond the opposing ideas of Jean-Claude Juncker and Wolfgang Schäuble for future euro-area governance, Guntram Wolff explores how alternatives such as a reformed Eurogroup might yield more effective fiscal policy-making.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 4, 2017
Read article Download PDF More on this topic More by this author

Policy Brief

Beyond the Juncker and Schäuble visions of euro-area governance

Two diametrically opposed visions of the euro-area architecture have been put forward. Departing from both Juncker’s and Schäuble’s proposals, the author identifies new ideas to develop the euro-area governance

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 1, 2017
Read article More on this topic More by this author

Blog Post

German wages, the Phillips curve and migration in the euro area

This post studies why wages in Germany have not borne strong increases despite a relatively strong labour market. I list four reasons why announcing the death of the Phillips curve – the negative relationship between unemployment and wage growth – is premature in Germany. One of the reasons I report is substantial immigration from the rest of the EU.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: November 29, 2017
Read article Download PDF More by this author

Parliamentary Testimony

Croatian Parliament

After the crisis: what new lessons for euro adoption?

Key learning for euro adoption lies within the experience of southern euro member states and the macroeconomic performance of euro ‘ins’ and ‘outs’ among newer member states. Zsolt Darvas discusses promising signs for eventual euro adoption in Croatia and the unsuitability of the Maastricht fiscal criteria for joining the euro, in his speech delivered at an event organised in the Croatian Parliament on 15 November 2017

By: Zsolt Darvas Topic: Croatian Parliament, European Macroeconomics & Governance, Testimonies Date: November 20, 2017
Read article More on this topic More by this author

Blog Post

A slightly tighter ECB

The ECB’s recent decision on QE was somewhat on the dovish side. Francesco Papadia gives his view on why it is time to start a discussion about reducing the degree of ease of monetary policy.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: November 15, 2017
Read article More on this topic More by this author

Blog Post

Accounting for true worth: the economics of IFRS9

The introduction in 2018 of forward-looking provisioning for credit losses in EU banks delivers on a key objective in the post-crisis regulatory agenda. This was intended to dampen future lending cycles. For now, banks will be sheltered from the impact on regulatory capital requirements, as the implications for financial stability are far from clear. In any case, the new standards should encourage the disposal of banks’ distressed assets, underpinning the ongoing agenda on NPLs.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: November 13, 2017
Read article More on this topic

Blog Post

The Eurosystem - Too opaque and costly?

The Eurosystem gets a lot of attention from academics and the media, but they largely focus on its statutory objective of maintaining price stability. There is much less interest in its transparency and operational efficiency. We analyse these issues, and find that the Eurosystem is less transparent and operates with significantly higher costs and headcount than the US Federal Reserve System.

By: Francesco Papadia and Alexander Roth Topic: European Macroeconomics & Governance Date: November 6, 2017
Read article More on this topic More by this author

Blog Post

Euro-area enlargement: a new opening?

8 of the EU27 have not yet joined the Euro, and progress in euro-area enlargement seems to have stalled. Commission President Juncker wants to give new momentum to the process, but the path is full of political and technical hurdles. The Euro is unlikely to have any new members soon.

By: Marek Dabrowski Topic: European Macroeconomics & Governance Date: November 2, 2017
Read article Download PDF More on this topic

Policy Brief

The time is right for a European Monetary Fund

Two of the banking union’s pillars – common European supervision by the European Central Bank and common European resolution by the Single Resolution Fund – are up and running. But the third, common European deposit insurance, is still missing. The authors propose to design the EMF as part of a broader risk-sharing and market-discipline agenda.

By: André Sapir and Dirk Schoenmaker Topic: European Macroeconomics & Governance Date: October 30, 2017
Load more posts