Author(s): Lorenzo Bini Smaghi and Michala Marcussen
Date published: May 2018
SUERF Policy Note, Issue No 35
By Lorenzo Bini Smaghi and Michala Marcussen
The euro area is currently facing a dilemma. While it is widely recognized that its architecture needs to be strengthened, some of the key proposals to achieve this goal encounter political difficulties. Genuine Eurobonds with joint and several liability would bring significant economic benefits and stability. However, they would require transfer of fiscal policy sovereignty from the member states to the euro area, that does not appear to be politically feasible in the foreseeable future. On the other hand, just keeping the status quo exposes the fragility of the euro area in the event of a new crisis. Several authors have sought to address these dilemmas through various proposals. This paper presents our contribution to the debate.
Essentially, we propose a 20-year transition that levers on the Fiscal Compact’s requirement to reduce the excess general government debt above 60% of GDP by 1/20 every year. The amount of debt consistent with the Fiscal Compact’s annual limit would be “Purple” and protected from any debt restructuring demands under an eventual ESM programme. Any debt above the limit would have to be financed with “Red” debt, that would not enjoy any guarantees. At the end of the 20-year transition period, when Purple bonds will stand at 60% of GDP, these could become genuine Eurobonds as set out in the initial Blue-Red bond proposal by Delpla and von Weizsäcker (2010) can be implemented. We believe that this proposal would both encourage fiscal discipline and limit the risk of new costly crisis for the euro area.
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