Why It Is Time for a European Debt Agency
E2 TRILLION IN INTEREST PAYMENTS IS HOW MUCH WOULD HAVE BEEN SAVED BY THE EUROZONE GOVERNMENTS IF SUCH AN INSTITUTION HAD BEEN SET UP AT THE SAME TIME AS THE EURO WAS INTRODUCED.by Massimo Amato, Associate Professor of Economic History, and Carlo A. Favero, Deutsche Bank Chair in Asset Pricing and Quantitative Finance
Jean Monnet, the father of Europe, used to say: "Europe will be forged in crises". If this is so, then no moment is more favorable to change than the time we are living in. In fact, we are at the conjunction of three crises: the one, hopefully about to pass, of Covid, the climate crisis and the need for a European Green Deal, and, lastly, the geopolitical crisis in progress.
All this requires major investment: for military integration (a condition for effective diplomacy) and energy (energy union, common grid, new energy mix and independence from Russian gas), without forgetting the public goods of health and education. And it implies an adequate strategy for financing public debt that will only grow.
That this is the case can be shown by looking at the most "virtuous" nation, Germany: Finance Minister Lindner, until yesterday a supporter of the return to the stability pact and of "schwarz null", proposed a €100-billion plan to strengthen the Bundeswehr over ten years to be financed with debt under the Golden rule (exemption of specific investments from deficit criteria); as for energy, only for stabilizing the grid in the transition to renewables, the need for a storage requirement of 2 terawatt-hours in ten years was calculated, equivalent to approximately a €200-billion investment. To this are added, at the EU level, infrastructure investment planned for the efficiency of the electricity grid between now and 2030 equal to a figure varying between €375 and €425 billion.
But the time is also right for debt financing. In recent months, less restrictive rules could be decided, and this will require greater coordination in the access of eurozone states to markets for their financing.
The picture is made even more complex by the inflationary pressures caused by these crises, with restrictive implications for monetary policy and the asymmetrical increase in the cost of financing sovereign debt throughout the euro area.
Our proposal for a European Debt Agency (EDA) goes in the direction of coordinating and containing the cost of servicing public debt, without mutualization. The EDA would target financial markets by issuing bonds and give back the funds obtained to the eurozone states under the form of perpetual loans. In turn, states would repay them according to annual instalments calculated on the basis of their fundamental risk, that is, without any kind of mutualization. However, states would be covered from liquidity risk, and therefore from the more volatile and irrational element of market pricing, linked to "market sentiment".
In a scientific article, we calculated the savings that an agency of this type would have accrued all member states if it had been established at the birth of the euro: despite the rules of the Stability and Growth Pact, all the countries of the eurozone in 2002-2019 period, including Germany, would have saved on the service of their national debt a figure in the order of €2 trillion in interest payments, linked to the only partially irrational exuberance of the markets, which, rather than seeing the Union as a whole, considered the members of the single currency as if there were no solidarity between them.
Europe faces great challenges in an increasingly uncertain and risky scenario, calling for greater unity and cooperation, and this must also pass through a more intelligent management of government debts.
