Macron’s fiscal union points the way for eurobonds
The election of Emmanuel Macron as French president brings the first opportunity since the start of the eurozone for a serious discussion about eurobonds. Debt instruments for the eurozone come in different flavours, and can be used for different purposes. It makes no sense to say that you are in favour of or against them unless you talk specifics.
It is true that Mr Macron has never suggested a eurobond to mutualise legacy debt. Over the past 10 years, there have been several proposals in that direction. The Bruegel think-tank in Brussels proposed a scheme in 2010 to mutualise parts of the existing national debt, but no more than 60 per cent of a country’s gross domestic product. The German Council of Economic Advisers proposed a debt redemption bond, a eurobond with the explicit purpose for debt reduction.
A more recent discussion focused on a clever securitisation scheme: the EU would buy up a portion of national sovereign debt and turn it into European Safe Bonds. This is similar to the way banks used to buy up mortgage-backed securities and turned them into hideously complicated collateralised debt obligations. We all know how that went.
The only indirect mutualisation that is taking place is the European Central Bank’s programme of asset purchases. Mutualisation is not the officially declared goal but a side effect. But the purchases will eventually end.
The eurobonds we are discussing today are different. They are the eurobonds implicit in Mr Macron’s proposal for a fiscal union. A fiscal union worth the name requires limited tax-raising powers and the ability to issue debt — eurobonds in other words. Germany’s Social Democrats also want something they call a “fiscal union”, a joint eurozone budget, funded by member states, for the explicit purpose of funding investment. But this is not a fiscal union. It is a slush fund. So we should beware of grand labels and always ask what is behind them.
The extreme options of creating a federal state or just reclassifying some portions of national spending as European are either unfeasible or not useful. Much more interesting is the intermediate option of a clearly focused eurozone budget limited to a few areas.
I would like the eurozone to do three things: first, set up a re-insurance system for national unemployment funds. If one member state suffers a shock, its unemployment insurance system would receive compensation. This is not redistribution from the north to the south. The flows could go in the opposite direction.
The second would be a defence procurement union. Defence procurement represents one of the few areas where harmonisation achieves large cost savings. Finally, there should be the capacity to create a fiscal backstop for the financial sector in a crisis.
Such a fiscal union would be small. It would act as only a very limited macroeconomic stabiliser. But it would be preferable to the current rules-based system that leaves little room for counter-cyclical policies.
Over time, the eurobonds would replace national sovereign debt. If a country wants to default on its legacy debt, let it. The eurobonds would dismantle the toxic nexus between banks and governments. The no bailout rule would suddenly make sense. This is an environment in which states can default.
Others have raised a further issue: a fiscal union is neither necessary nor sufficient for the sustainability of the eurozone because it does not address internal imbalances. I agree that a limited fiscal union would not be able to get Germany to raise wages. But we should think about it as the beginning of a process. More political integration will need to follow.
There are alternatives to a fiscal union, but they are either implausible or politically unpalatable. For example, it is theoretically possible to allow member states to drop out of the eurozone. But this is not an outcome that policymakers are actively seeking or discussing because it is too risky, and would threaten the cohesion of the EU.
Another frequently mentioned minimalist solution is a pure banking union. Since banks are the most fragile part of the economy, a banking union would provide sufficient reinsurance against financial crises. But for this to work, it has to be perfect. It would require a fiscal resolution capacity and a common deposit insurance system. The eurozone has neither.
The reason pro-Europeans like me keep banging on about eurobonds and fiscal union is not that we seek the maximum possible degree of European integration (although some of us do). More important is that this option is the most effective among the choices available and, yes, also the most realistic. There really are no alternatives in the long run.