Social Europe

politics, economy and employment & labour

  • Themes
    • Global cities
    • Strategic autonomy
    • War in Ukraine
    • European digital sphere
    • Recovery and resilience
  • Publications
    • Books
    • Dossiers
    • Occasional Papers
    • Research Essays
    • Brexit Paper Series
  • Podcast
  • Videos
  • Newsletter
  • Membership

Why A Rebooted ESM Is Much Better Than An EMF

Marcello Minenna 1st February 2018

Marcello Minenna

Marcello Minenna

After the controversial European Monetary Fund (EMF) proposal by the European Commission of December 2017, it’s clear that the debate about the future role and structure of the European Stability Mechanism is not over. It will only end when the Euro area benefits from a unified government bond market with a single risk-free yield curve. This will not be easy to achieve while respecting what markets think of the sovereign risk of peripheral countries, but it can be done. The road is not, however, the EMF envisaged within a plethora of proposals from the European Commission. The first, fundamental step would be certainly to transform the European Stability Mechanism (the bailout fund established in 2012) but into an insurer of last resort for the public debt of all Eurozone countries.

These are the key features of my idea. Riskier members of the reformed ESM should pay insurance premiums, that would increase the fund’s capital by many orders in comparison to the current level of €80billion that is inadequate to bail-out even a large-sized economy like Spain, and would boost its investment capacity. The more the sovereign risk of a country, the higher the premium to be paid. It’s not rocket science, but a simple, effective mechanism that resembles the functioning of a classic derivative instrument, the Credit Default Swap. Using more technical jargon, the premium is needed to hedge the difference between the credit risk of the different Member countries and the Eurozone average. An appreciable feature of this mechanism would therefore be the fact the size of the insurance premium would be determined by market evaluations of credit risk so far from being driven by strong political influences.

The process of insuring debt should happen gradually; as the old bond issues of each government come to maturity, the ESM would substitute them with new tranches of a common guaranteed Euro area debt. After completing this operation of risk-sharing (not less than ten years, according to my estimates), Eurozone countries would no longer be allowed to issue public debt independently from this common ESM issue program. Or, putting it another way: at the end of this sequence each Eurozone country would give up its fiscal autonomy in exchange for a full mutualization of its past government debt.

In the 10-year long process of transition, indeed, premiums paid for the ESM guarantee represent a shield against potential fiscally irresponsible behavior of a “free-rider” country. The contribution scheme in fact would discourage reckless fiscal policies, because it’s understood that more debt would mean more credit risk to be insured and then it could be issued only with higher contributions to the reformed ESM.

Real economy investments

In normal times, the proceeds of the reformed ESM would be invested in the real economies of Member States. Again, it would be useful to use an intuitive criterion of proportionality: higher premiums should guarantee a greater quota of investments. The ESM’s financial backing would be granted only to highly profitable projects. In this perspective, fixed capital formation has the highest multiplier across all components of public expenditure, especially if concentrated in high-potential, but depressed areas like southern Italy. Obviously, there would be a problem of accountability related to investment management activities (selection, administration, revision). This could be addressed by transferring all powers to a supranational, independent institution (e.g. the European Fiscal Board) with a neutral view based only on objective economic indicators of profitability.


Become part of our Community of Thought Leaders


Get fresh perspectives delivered straight to your inbox. Sign up for our newsletter to receive thought-provoking opinion articles and expert analysis on the most pressing political, economic and social issues of our time. Join our community of engaged readers and be a part of the conversation.

Sign up here

By construction, this design of a reformed ESM will produce a convergence of government yields towards a single curve for the entire Eurozone in a form even stronger than the one experimented with in the first years of life of the Euro (until the crisis of 2007-2008). In fact, a fully mutualized debt naturally implies a homogeneous credit risk evaluation, since national public debts would eventually disappear and merge within a Eurozone one. In this way we will enjoy the re-birth of Eurobonds, even if in a synthetic form, managed by a reformed ESM that would accordingly assume many of the powers of the current Ministers of Finance of the Member States and would make the proposed reform of the European Commission readily obsolete.

To conclude, I’m supporting a radical proposal, “peripheral-friendly” of course, but one that is respectful of market evaluations and that moves towards a federalist Europe. An ESM 2.0 based on risk-sharing, a single yield curve and the rebooting of fruitful public investments with a higher degree of flexibility than today could form the skeleton of a future federal budget that can rely on the possibility of issuing Eurozone supranational bonds.

This concrete, market-based concept represents an alternative to the German proposal of transforming the ESM into a severe fiscal authority independent of political bodies and inserting creditor participation clauses within the government bonds of the different member states.

Obviously, this would have a major impact on current Eurozone financial infrastructures. The EU institutions should support the process of convergence with various other measures: for example, in the early years, the architecture of the Fiscal Compact should be properly harmonized to exclude the premium paid to the reformed ESM from the calculations related to the structural balance. In the end, with a mutualized debt, the same Fiscal Compact regulation would not be needed anymore. Moreover, ECB support should be guaranteed through the prosecution of its asset purchase programs for a reasonable extended timeframe.

Of course, it may not be politically feasible given the current circumstances that are pushing in the opposite direction towards a segregation of risks within each country of origin. This process is on stand-by¸ waiting for the results of Italian elections, but it will restart in full force immediately after they take place. However, recent developments do not make me optimistic about the future of the Eurozone integration process: the proposal for European Safe Bonds is gaining a lot of traction but it’s not that brilliant an idea – these are fake Eurobonds without any real risk-sharing between Member countries and pose more problems than they solve…

Marcello Minenna

Marcello Minenna is head of the quantitative analysis unit in Consob (the Italian Securities and Exchange Commission). He has taught quantitative finance at Bocconi University and at the London Graduate School of Mathematical Finance. He is a regular writer for the Wall Street Journal and Corriere della Sera and is a member of an advisory group which supports the economic analysis of the biggest Italian trade union, CGIL.

You are here: Home / Economy / Why A Rebooted ESM Is Much Better Than An EMF

Most Popular Posts

Ukraine,fatigue Ukraine’s cause: momentum is diminishingStefan Wolff and Tetyana Malyarenko
Russia,information war Russia is winning the information warAiste Merfeldaite
Nanterre,police Nanterre and the suburbs: the lid comes offJoseph Downing
Russia,nuclear Russia’s dangerous nuclear consensusAna Palacio
Belarus,Lithuania A tale of two countries: Belarus and LithuaniaThorvaldur Gylfason and Eduard Hochreiter

Most Recent Posts

G7,BRICS,China,Russia G7 versus the BRICS: taking stock in 12 figuresThorvaldur Gylfason
solar energy,photovoltaic,Europe,EU,PV Powering up: the EU and solar energyFrancesco Crespi, Dario Guarascio, Serenella Caravella and Giacomo Cucignatto
Nagorno-Karabakh Nagorno-Karabakh: it’s not over yetSvante Lundgren
Sweden,climate,green Sweden’s climate policy—off the railsLisa Pelling
Biden,Detroit,UAW,strike Detroit, Joe Biden and a union renaissancePaul Knott

Other Social Europe Publications

strategic autonomy Strategic autonomy
Bildschirmfoto 2023 05 08 um 21.36.25 scaled 1 RE No. 13: Failed Market Approaches to Long-Term Care
front cover Towards a social-democratic century?
Cover e1655225066994 National recovery and resilience plans
Untitled design The transatlantic relationship

Foundation for European Progressive Studies Advertisement

The summer issue of the Progressive Post magazine by FEPS is out!

The Special Coverage of this new edition is dedicated to the importance of biodiversity, not only as a good in itself but also for the very existence of humankind. We need a paradigm change in the mostly utilitarian relation humans have with nature.

In this issue, we also look at the hazards of unregulated artificial intelligence, explore the shortcomings of the EU's approach to migration and asylum management, and analyse the social downside of the EU's current ethnically-focused Roma policy.


DOWNLOAD HERE

Hans Böckler Stiftung Advertisement

WSI European Collective Bargaining Report 2022 / 2023

With real wages falling by 4 per cent in 2022, workers in the European Union suffered an unprecedented loss in purchasing power. The reason for this was the rapid increase in consumer prices, behind which nominal wage growth fell significantly. Meanwhile, inflation is no longer driven by energy import prices, but by domestic factors. The increased profit margins of companies are a major reason for persistent inflation. In this difficult environment, trade unions are faced with the challenge of securing real wages—and companies have the responsibility of making their contribution to returning to the path of political stability by reducing excess profits.


DOWNLOAD HERE

ETUI advertisement

The future of remote work

The 12 chapters collected in this volume provide a multidisciplinary perspective on the impact and the future trajectories of remote work, from the nexus between the location from where work is performed and how it is performed to how remote locations may affect the way work is managed and organised, as well as the applicability of existing legislation. Additional questions concern remote work’s environmental and social impact and the rapidly changing nature of the relationship between work and life.


AVAILABLE HERE

Eurofound advertisement

Eurofound Talks: does Europe have the skills it needs for a changing economy?

In this episode of the Eurofound Talks podcast, Mary McCaughey speaks with Eurofound’s research manager, Tina Weber, its senior research manager, Gijs van Houten, and Giovanni Russo, senior expert at CEDEFOP (The European Centre for the Development of Vocational Training), about Europe’s skills challenges and what can be done to help workers and businesses adapt to future skills demands.

Listen where you get your podcasts, or for free, by clicking on the link below


LISTEN HERE

About Social Europe

Our Mission

Article Submission

Membership

Advertisements

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641

Social Europe Archives

Search Social Europe

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Follow us

RSS Feed

Follow us on Facebook

Follow us on Twitter

Follow us on LinkedIn

Follow us on YouTube