Why we need European debt issuance (our 'safe asset')

Draghi's report on European competitiveness contains the diagnosis of the European disease, i.e. the lag in productivity and technological innovation compared to the US and China; it contains the punctilious description of the necessary cures, but it also tells us that the doctor capable of applying the cures is missing. In other words, Europe is lacking, as much of its regulation and institutional set-up, i.e. its governance, is unsuitable for curing the disease, as it is itself a component of the disease. This last part of the Report has strangely been seized upon by many commentators as its weak part, that is, the element that would make it a dreambook overall. It is the absence of a European government, or at least a trace of one, that is holding Europe back.

That this is not an overly extremist reading of the Draghi Report is in my view demonstrated by the reactions to its central point, namely the need to resort to European debt to finance additional investment programmes estimated at around 800 billion per year. This is the central issue because it concerns, precisely, the future of Europe in its international relevance. European debt issuance is not only a means for financing investment programmes in strategic sectors that the individual budgets of the member states are unable, or unwilling, to support. European debt issuance means, as explained in the report, albeit perhaps with insufficient force, issuing 'safe assets', i.e. safe securities that are necessary to strengthen Europe's financial structure, but above all potentially attractive to global financial markets and central banks as a component of their official reserves. It means allowing the euro, and euro-denominated securities, to stand more closely alongside the dollar as an international currency and help rebalance the international monetary system, with the associated possibility of facilitating the unwinding of global trade imbalances. All this is important for Europe. If we go back to its delays denounced by Draghi, but well known even before reading the report, which has the merit of giving a structured and complete representation of them, they are due to an investment gap compared to the current great economic powers, namely the US and China. China finances its investments by drawing on its large domestic savings reserve, which, for the time being, cannot move freely to seek returns in global markets. The US does not have sufficient domestic savings - as a percentage of GDP it is much smaller than Europe's - but draws on the world's savings. It is the rest of the world that finances US investments. This is for many reasons, but also because the US issues the international currency and dollar-denominated 'safe assets' that still account for the largest share of the world's central bank reserves. The role of the euro, on the other hand, is secondary in the world, not least because it does not offer 'safe assets' to the world other than the Eurozone. This means that not only does Europe not attract savings from the rest of the world, but it must curb the outflow of European savings. Of course, the American privilege of international demand for its debt securities is based on the fact that American debt is still deemed fiscally sustainable and on the soundness of its federal government and institutional system.

But back to Europe and the proposal to issue European debt to finance European growth and competitiveness. A European debt requires a European fiscal capacity and a trustworthy European debt and fiscal authority. In short, a European government, whatever form you want to give it. Twenty-seven EU member states, paralysed by short-term and special interests and the ability to block each other through vetoes, do not represent a 'sovereign' government. Therefore a revision of the treaties is necessary. The report states that while a revision of the treaties is necessary, much can be done with 'targeted adjustments', even without this revision. Personally, I believe that without a revision of the treaties we cannot get to the heart of the problem: behind a 'sovereign debt' there must be a 'sovereign government' that ensures its sustainability, so that the securities of this debt represent international 'safe assets'. On the other hand, it does not seem to me that there is any other way to increase investment in Europe by about 5 percentage points of GDP without having to cut other uses of GDP, i.e. consumption, by a corresponding amount, with imaginable political and social difficulties. While European debt would mean that global savings could also be used for this purpose.

In the face of this call to reality, European governments are busy working out how to survive in the 'surreal world' packaged by the European Commission 'Von der Leyen 1' with the reform of European fiscal rules that has just been launched, which, in fact, seems to ignore that Europe exists, concentrating on how to regulate the budgets of national states while ignoring their interdependencies in terms of investments and the destination of savings. We do not know whether or not the 'Von der Leyen 2' Commission is preparing to meditate on the Draghi Report or whether it wants to continue to navigate in a closed, self-referential world. A world, that is, of dreams.