France joins EU bonds plea

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A top advisor to the French government yesterday (17 February) recommended that European countries issue joint government bonds to offer a credible alternative to the American securities market which, despite the US-born financial storm, is still attracting most foreign capital as world investors seek protection from the turmoil.

“If Europe wants to grab the chance offered by the crisis to attract more capital, it has to increase the size and the liquidity of its government bond markets by issuing common bonds,” said Jacques Delpla, speaking before financial experts yesterday (17 February) at Bruegel, a Brussels-based think-tank. 

Delpla, a member of the Council for Economic Analysis, an advisory body to French Prime Minister François Fillon, said joint EU bonds would also enhance the role of the euro as a reserve currency, challenging the dollar’s supremacy.

Delpla’s call came as world investors increasingly turn to the US for safety as the financial storm continues to rage. Last week, a top Chinese economic official said Beijing will stick to US bonds, regardless of the critical condition of the American economy and US public debt. According to Delpla, this is because the American government security market remains the most liquid in the world.

US federal debt amounts to almost $10.5 trillion, of which around six trillion is sold on the market. These numbers dwarf the German bond market, the biggest in the euro zone, which is worth about €1 trillion. This makes the German bond market less liquid and means that investors still turn to the US market, the size of which they find comforting, despite the current crisis. In short, size does matter in bond markets, Delpla said.

An EU common bond market worth €4 trillion

Delpla, who was current French President Nicolas Sarkozy’s economic advisor when he was French economy minister in 2004, presented a detailed plan to create an EU common bond market worth €4 trillion in top-rated securities.

To soothe German concerns, he suggested splitting joint EU bonds in two categories. The first, labelled “senior” common debt, would pool the safest securities issued by governments. The second, called “junior” common debt, would carry the less safe bonds. 

Membership of the bond club should be voluntary but subject to strict fiscal rules, and virtuous countries should have the right to expel the “bad guys,” Delpla further suggested.

A European Monetary Fund?

To guarantee junior common bonds against the risk of default, Thomas Mayer, chief European economist at Deutsche Bank, proposed the establishment of a European Monetary Fund. The body would intervene in favour of the bond club members in budgetary difficulties. However, disputes over how to fund the new body are to be expected should it ever be set up.

Czech cold shower

Meanwhile, supporters of joint EU bonds were given a cool reception by Czech Prime Minister and temporary EU President Mirek Topolánek. Speaking yesterday in the European Parliament, he dismissed the idea as risky for the soundness of public debt.

The idea of issuing common EU bonds was re-launched in September by an unusual coalition of Italian MEPs. The idea received the backing of Eurogroup President Jean-Claude Juncker last November (EURACTIV 19/11/08), while the Socialists have already backed it on several occasions. Joseph Daul, leader of the centre-right EPP-ED Group in the Parliament, confirmed his support for the idea in a recent interview with EURACTIV.

The idea of EU joint bonds was launched for the first time by former president of the European Commission Jacques Delors via his 1993 plan for growth, competitiveness and employment, the predecessor of the Lisbon Agenda. He sought to find new ways to finance the European budget.

In 2000, then Commission President Romano Prodi re-proposed the idea. A report prepared by a group of financial experts led by Alberto Giovannini explained the technicalities of issuing common bonds to attract foreign capital.

But the Council opposed the idea, mainly due to German scepticism. Berlin fears that joint issuing of EU bonds would ultimately increase its cost of borrowing capital. Due to opposition from German MEPs, the European Parliament failed to present a common resolution in favour of EU bonds (see relevant EURACTIV interview with MEP Joseph Daul). On the other hand, Eurogroup President Jean-Claude Juncker recently supported the idea.

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