Why it is necessary to create a common European debt

In order to acquire strategic autonomy on the international level and to reproduce its social model, the European Union (EU) has to face radical challenges: the realisation of huge innovative investments compatible with the green transition, the strengthening of the defence industry so as to build common protections, the retraining of human resources including the active integration of migrants through renewed processes of education and social inclusion. These multiple challenges are to be financed with substantial public and private resources to be found at the European level. It is therefore no coincidence that the heads of relevant institutions (Fabio Panetta and Isabel Schnabel) and scholars with rich institutional experience (Olivier Blanchard and Angel Ubide) have relaunched the need to issue those European debt securities already called for by Draghi and others.

Together with Marco Buti, I have long insisted on the crucial importance of such issues in order to feed a permanent Central Fiscal Capacity (Cfc) able to finance the production of European Public Goods (BPE) and to counter the fragmentation of the European financial market also through the creation of a common safe asset. This would facilitate the mobilisation of household financial wealth for private investment support. However, Lorenzo Bini Smaghi emphasised in the 'Foglio' that public funding of Bpe is not enough to create a European safe asset and unify financial markets in the short to medium term. The already existing stock of European debt securities (less than one trillion euros) and their new flows, solicited by Draghi for an annual scale of about 250 billion euros, would in fact take decades to translate into a stock of an amount comparable to that of the international safe asset (US Treasury securities equal to about 29 trillion dollars) or to surpass the current imperfect substitute for the European safe asset (German public securities equal to about 2.7 trillion euros).

Such evidence should not fuel pessimism with respect to European potential. As Bini Smaghi recalls in the wake of Blanchard-Ubide, it is rather a matter of going back to old hypotheses of replacing the stocks of euro area member states' (Ea) public bonds with European debt securities (see my 2011 paper, which appeared in Ceps). With a few adjustments, the realisation of those hypotheses would in fact make it possible to create a competitive European safe asset, to strengthen the area's financial markets, and to ensure adequate European public financing with respect to the challenges ahead.

Today, the stock of government bonds, which belongs to all Ea Member States, is around EUR 13.5 billion and is equal to about 88% of the area's GDP. If an institution such as the European Stability Mechanism (ESM) were to place debt securities on the market in the medium term for an amount corresponding to that stock or to a significant share of it (e.g. 60% of the area's GDP or the share not held by the ECB), it would have the financial resources to absorb - in whole or in part - the national debt securities. The balance sheet of the ESM would remain balanced because, against the total debt to market investors, an equivalent claim would accrue against the individual Member States; therefore, at least in the first instance, there would be no burden-sharing of national debts. Moreover, the debt of the EMG would quickly reach a critical mass that, if guaranteed, would be adequate to configure its securities as an international safe asset; the relative interest rates would therefore be lower than those borne by individual Ea countries. Lastly, the ESM could use its current financing capacity (about EUR 500 billion) and the positive differentials between the interest accrued on its credit and that paid on its debt, to ensure (also by means of leverage) public support for the BPE and other European investments.

These steps seem capable of fulfilling the two fundamental objectives required: creation of a central safe asset that mitigates the fragmentation of the financial markets; public and private funding needed to make the EU meet the challenges it faces. Incidentally, the outlined configuration would facilitate the management of the public budgets of the individual Ea countries, as compliance with European fiscal rules would be (wholly or to a large extent) removed from the volatile pressure of the markets to be regulated by the relations between national governments and central institutions (including the ESM). The biggest obstacle to the proposal, however, lies in the fact that the pressure of financial investors would shift from national debts to the debts of the ESM. What guarantees could ensure a smooth market placement of the massive issuance of securities by the ESM, moreover with rates of return proper to asafe asset?