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DNB/IMF Workshop 13-14 October 2011 Can Eurobonds be an Effective Economic Instrument in the Euro Area? Fabian Amtenbrink (Erasmus University Rotterdam) Jakob de Haan (DNB & University of Groningen) [email protected] [email protected] Structure of the paper and this presentation • The flawed Maastricht system of economic governance in EMU… • … and the limited effect of the ‘six-pack’ • Can Eurobonds become a more effective economic instrument in the euro area? • What are the legal hurdles for the introduction of Eurobonds? • Some preliminary conclusions Paper and presentation reflect Work in Progress! The flawed Maastricht system of economic governance in EMU (1) • Regulatory gap between economic policy coordination and single monetary policy in the euro area • Regulatory gap between multilateral surveillance and excessive deficit procedure • Neither primary Union law nor Stability and Growth Pact offer effective instruments to enforce compliance with BEPGs and Stability/Convergence Programs The flawed Maastricht system of economic governance in EMU (2) • Decision-making is political process • Excessive deficit procedure is hardly enforceable • Response to euro area sovereign debt crisis has moreover resulted in a shift in paradigm The recent reform (the six-pack) will not fundamentally change the equation • Reform package does not constitute the ‘fundamental shift in economic governance’ announced by European Council • Most notable change is new focus on macroeconomic imbalances, including sanction regime • New sanction regime for the multilateral surveillance & excessive deficit procedure cannot repair birth defects in Article 121 and 126 TFEU • Last-minute political bargaining has partly weakened innovation of reversed voting in multilateral surveillance procedure What way forward in economic governance in the euro area? • Fundamental reforms will have to satisfy two basic conditions: – Effectiveness: system ensures fiscal discipline and rule out speculation against individual countries – Feasibility: extent to which a reform implies a further (undesired) transfer of policy and decision-making power from the national to the supranational level • Could a European system of debt financing be an effective and feasible way forward? Introducing Blue Bonds and Red Bonds – the Delpla and von Weizsäcker Proposal • Delpla and von Weizsäcker (2010; 2011): a system of Blue and Red Eurobonds • Sovereign debt up to 60% theshold covered by European bonds jontly-and-several guaranteed by the participating Member States (blue bonds) • Independent new Stability Council charged with allocating blue bonds • Member States are allowed to issue own debt instruments beyond the 60% threshold (red bonds with junior status) • No EU bail-out for red bonds! Introducing Eurobonds next to national bonds - a good idea? • Introduction of system of EU guaranteed bonds next to national debt bonds creates perverse incentives on parts of Member States • How credible is a no-bail-out clause for red bonds in the light of past experience with current system? • Market speculation against individual countries remains a possibility as countries are still allowed to issue own debt instruments (rescue mechanisms remain thus necessary) Compatibility of Eurobonds with (existing) Union law • What legal basis for the introduction of a Eurobond system? – Articles 121/126 TFEU – Article 136(3) TFEU – A new provision in primary Union law? • Would the introduction of Eurobonds be in breach of primary Union law? – General principle of debt financing at market conditions – Articles 123/124 TFEU – Article 125 TFEU = no-bail-out clause Compatibility of Eurobonds with national constitutional law • Constitutional objections arising from the loss of budgetary power of national parliaments – E.g. decision by German Federal Constitutional Court on German financial aid to Greece and participation in EFSF – References by several highest courts in other Member States to ‘constitutional identity’ • Constitutional objections arising from the existence of constitutional debt ceilings – Joint or joint-and-several liability = debt ? – How to take deal with risks arising from liability? Some preliminary conclusions • Economic governance in EMU has failed to attain the basic economic objectives of EU • Fundamental reorientation called for! • Proposal of Blue and Red Bonds does not solve fundamental problems in the sphere of economic governance • Countries may actually regain sovereignty from financial markets! THANK YOU !