By reducing their debt, European countries, will return to economic growth. But creating redemption funds, and eurobligations, raises the spectre of fiscal union. EurActiv France reports.
Although the idea looks great on paper, pooling the public debt of EU member states is a hotly debated topic: should they increase economic integration by creating European obligations, and a fund to arbitrate public debt risks? Or, should the tools put in place to monitor the finances of member states (2 pack, 6 pack) be put to the test?
The European Commission asked experts to write a report on the matter last summer. When the report was presented to the European Parliament Committee on Economic and Monetary Affairs on 1 April, it led to intense exchanges on what turned out to be very political issues: Should there be more or less “Europe”, more or less solidarity, more or less cooperation regarding budget and revenue.
The authors of the report were wary regarding problems of economic growth and the unemployment, matters partially linked to the high debt of member states.
Debt, future risks would be less if pooled
“The current debt crisis is a future risk. Even if pooling it across the EU alleviated the risk, especially for states with the highest debt, it must not substitute the crucial national effort necessary to recover a healthy budgetary equilibrium” warned the experts, led by a former member of the Central European Bank, Austrian economist Gertrude Tumpel-Gugerell.
The level of public debt is increasing across European states, including France, Spain and Italy.
The report outlines two stages in pooling sovereign debts in the Eurozone. The first refers to creating short-term obligations, or short-term eurobonds, which would allow governments to refinance under a single interest rate. This mechanism would provide a way to avoid liquidity crises. Currently, countries with the highest debt cannot issue bonds without paying a high price. Therefore they struggle to refinance, and debt service increases.
New European treaty hangs in the balance
The need to revise treaties is an important element of the debate. The economists chosen by the Commission suggest using current agreements that authorise the “coordination of fiscal policies” in order for states to put in place new financial tools through intergovernmental agreements. They therefore leave the decision of pooling public debt to the discretion of the member states. Otherwise, a new treaty would be necessary.
“The problem is that this scheme is contradictory: we want to put in place a mechanism to compensate macroeconomic inequalities, but we are reintroducing an aspect to decision making based on tax qualification. Would it not be better to face the problem once and for all and to change the treaties, as advocated by Wolfgang Schaüble, the German minister for finance?” asked the French socialist MEP Pervenche Berès.
German reservations on the issue are well known. According to the report, the German Greens fear that countries with high debt will be tempted to go it alone once the scheme is put in place, and stop making drastic efforts to solve their budget problems. Leaving it up to Eurozone member states threatens the first tool of the scheme, which is to share risk.
Pooling debt, a political decision
“Ultimately, are you for or against the scheme?” asked the Swedish MEP Ölle Schmidt, “because it is essential, if you want countries to join the Eurozone, that you believe in the mechanism created by you!”
The Belgian MEP Philippe Lamberts reversed the question, and asked if it was possible to evaluate the costs of non-action. “I live in the real world, and in this world, large member states do not respect the debt/GDP ratio” stated the MEP, highlighting the structural character of the economic downturn caused by debt.
Unfortunately for the MEPs, the authors of the report provide cautious answers.
“It is true that costs might be high, notably due to weak economic growth caused by the debt. However, one must not forget that sharing debt is not the only solution possible” stated Beatrice Weber di Mauro, managing director at UBS.
Important tools against future crises
Adopting these tools would require an assessment of existing schemes. Agnes Benassy-Quéré, professor at the Pantheon-Sorbonne University in Paris and co-author of the report, said to EurActiv that redemption funds and eurobonds are especially important in case of new crises.
Benassy-Quéré says that “we think the financial crisis is over, and we have a false sense of security today, but we have to be careful: (the) public debts of Italy, France and Spain could quickly get out of control. There is no evidence that the scheme put in place during the crisis is working! We are currently evaluating the tools in an uncertain environment. We do not really know if the scheme of Outright Monetary Transactions of the Central European Bank, which is the main tool to prevent another crisis, actually works. Equally, we are aware that the European Stability Mechanism is currently too weak for Italy.”
The report, which was presented to the outgoing Commission, will have no short-term impact. In the medium-term however, it could help solve some of Europe’s problems.
Agnès Benassy-Quéré claims that “there is a social aspect that must be taking into account. Indeed, European politicians risk unsettling the political system in the run up to the European elections. Something must also be done to tackle unemployment. Our proposals are part of a larger macroeconomic logic: it would allow states to secure lower interest rates, which would also promote investment by companies”.
Ever since the financial crisis the European Commission has been considering a scheme which would pool European public debt in order to homogenise interest rates and share risks. In July 2013 it assigned a group of experts to the task of evaluating potential redemption funds which would lead to greater financial solidarity.
Autumn 2014 : The new Commission will decide on pooling public debt