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My take on the EU submit.
(1/16)
It was a long time in the making, but it is a major step.
Time for a brief historical recap of the eurobonds debate.
Back in 2010-2012 we had a deep debate about the opportunity for EU governments to issue jointly.
(1/16)
It was a long time in the making, but it is a major step.
Time for a brief historical recap of the eurobonds debate.
Back in 2010-2012 we had a deep debate about the opportunity for EU governments to issue jointly.
(2/16) There were many interesting proposals but eventually only 3 were seriously considered:
1- Blue/Red proposal of @JacquesDELPLA and @jakob_eu
2- Eurobills by C.Hellwig and me
https://voxeu.org/article/eurobills-not-euro-bonds#.XxiHCvPJadk.twitter
3 - ESBies by @MarkusEconomist et al. https://voxeu.org/article/esbies-safety-tranches#.XxiHT4hAQCo.twitter
1- Blue/Red proposal of @JacquesDELPLA and @jakob_eu
2- Eurobills by C.Hellwig and me
https://voxeu.org/article/eurobills-not-euro-bonds#.XxiHCvPJadk.twitter
3 - ESBies by @MarkusEconomist et al. https://voxeu.org/article/esbies-safety-tranches#.XxiHT4hAQCo.twitter
(3/16) The proposals went nowhere, for various reasons. We designed Eurobills as a financial stability tool to avoid bad equilibria. Then in the summer of 2012 M Draghi announced OMT for the same reasons.
@ojblanchard1
@ojblanchard1
(4/16) Our calculations were right, OMT compressed spreads by the amount Hellwig and I predicted. But OMT made Eurobills essentially redundant
ESBies would remain useful even in a post-OMT world and the discussion continued, but there was not enough political buy-in.
ESBies would remain useful even in a post-OMT world and the discussion continued, but there was not enough political buy-in.
(5/16) The Blue/Red proposal would have been great but we could never work out the transition.
So ended the eurobonds debate.
The next idea was a Eurozone budget. The discussion started when I was advisor of @pierremoscovici at the French treasury.
So ended the eurobonds debate.
The next idea was a Eurozone budget. The discussion started when I was advisor of @pierremoscovici at the French treasury.
(6/16) With my colleagues at Treasury we wrote a proposal for an EU unemployment insurance with a borrowing capacity.
@pierremoscovici proposed the idea in a speech at Bruegel Annual Meeting @bruegel_org https://www.bruegel.org/2012/11/pierre-moscovicis-speech-at-bruegel-annual-meeting/#.XxiLgZhW2Ls.twitter
@pierremoscovici proposed the idea in a speech at Bruegel Annual Meeting @bruegel_org https://www.bruegel.org/2012/11/pierre-moscovicis-speech-at-bruegel-annual-meeting/#.XxiLgZhW2Ls.twitter
(7/16) The rationale was that creating eurobonds from legacy debt was in fact more complicated than creating a eurozone budget with a (small) borrowing capacity. Legacy debt was always politically radioactive. A budget was more forward looking and could provide economic benefits.
(8/16) The eurozone budget idea failed because Germany was never convinced.
I took away two lessons from these discussions:
1/ Eurobonds would come from a budget, not from legacy debt mutualization.
2/ Only a common external threat could provide the political momentum.
I took away two lessons from these discussions:
1/ Eurobonds would come from a budget, not from legacy debt mutualization.
2/ Only a common external threat could provide the political momentum.
(9/16) Covid-19 is this common threat, and Chancellor Merkel rose to the occasion. She saw both the need and the opportunity. She understood both the full implication of the Covid crisis and the fact that German citizens would be willing to do more. She made the case and she won.
(10/16) An interesting point here is that the new proposal is EU based, not eurozone based. This will prove much more important than people realize. When we discussed eurozone budget, we always had the issue that the parliament was for the EU, not the EZ.
(11/16) Hence we had to discuss the possibility of an EZ section within the EU parliament to deal with EZ budget, and we had to explain how it would interact with the EU multiyear budget, which made the whole thing even less practical.
(12/16) The new relief package is for the EU, not the EZ and this is much better.
What's next?
First, we will see how the new bonds trade. The EU is AAA rated so the yield will be very low or negative.
Second, @ecb will be able to buy these bonds as part of its program.
What's next?
First, we will see how the new bonds trade. The EU is AAA rated so the yield will be very low or negative.
Second, @ecb will be able to buy these bonds as part of its program.
(13/16) By the end of next year the ECB might well be holding more than a quarter of all EU sovereign debt, which will free up space for fiscal action.
The EU is finally running on two legs!
A word of caution, however: political risk will rise, not fall, over the next year.
The EU is finally running on two legs!
A word of caution, however: political risk will rise, not fall, over the next year.
(14/16) Financial, economic, and political cycles are strongly correlated but also asynchronous.
Finance moves first. When a crisis looms, the markets crash, the spreads widen before the economic shock.
The economy moves second. This baffles many people
Finance moves first. When a crisis looms, the markets crash, the spreads widen before the economic shock.
The economy moves second. This baffles many people
(15/16) but it's actually expected. By the time the economy hits bottom the markets are already looking at the recovery. That is their job. So stock markets can boom even as unemployment peaks.
Politics move last. Revolutions happen after disasters, not during.
Politics move last. Revolutions happen after disasters, not during.
(16/16) By the end of the year the EU economy will probably be recovering (there are risks of course, but that is my central scenario) and the same naive observers will be surprise to see political risk increasing. Don't be surprised!
