April 26, 2018
If you look at the debate about the future of the eurozone, our advice is to keep in mind that there are two dimensions on which such debates always take place. The first is about the issues: on safe assets (see more on this below), the completion of the banking union, and the pros and cons of a single eurozone budget. The second dimension is about who does what. This is the centre of focus in Brussels. It is about whether eurozone governance should be folded into the EU.
It is the latter dimension which is the focus on this story in the FT, according to which the European Commission is essentially seeking to incorporate a mini-ESM inside the Commission. The idea is for the EU budget to have the capacity to provide loans to countries, if they are hit by a macroeconomic shock of the kind that does not require a full-scale ESM programme. We could call it a mini-ESM. The FT talks about macroeconomic stabilisation function. The FT has seen a draft Commission proposal which request more financial leeway in the budget in order to make room for a stabilisation instrument. The intent is for this to be part of the 2021-2027 multi-annual financial framework - the EU’s budget for short.
The article says that the proposal does not set out precise figures, but that it would be large enough to require an increase in the EU’s own resources ceiling by a tenth of a percentage point of EU GDP. That number alone should tell us that we are not dealing with a truly macroeconomic stabilisation function. This is still in the spirit of the previous approach to stabilisation - through conditional loans - except that it is not inter-governmental.
The proposal sets out the wish for an increase in the EU’s maximum own resources ceiling from the current 1.2% to 1.3%. The EU’s actual spending in only 1%. The gap constitutes a metric for the EU’s ability to create credit, if needed, and for the EU’s credit rating. The story says the Commission will set out in a separate proposal how it would raise funds in the market with implicit guarantees from the EU budget. So, we are talking about a budget-backed lending facility at very low interest rates. The interest could be paid from the EU budget, from central bank seigniorage, or from a fund outside the budget with voluntary contributions from member states. What this tells us is that this proposal is already at a fairly advanced stage. Contrary to an ESM programme, funds disbursed under this facility would not require a quid-pro-quo of reforms and fiscal consolidation. It is hard not to see the irony in the last the FT’s report:
"Brussels is also considering how the euro area’s bailout fund, the European Stability Mechanism, could play a role in the new loan plan."
We also have stories on whether or not to take e-bonds seriously; on Macron’s love-in with Trump; on French protest movements; on how Rajoy might get his budget passed; on Germany’s continued obstruction to Greek debt relief; on the move of one of the EU’s military HQs from the UK to Spain; on the UK’s scorched-earth tactics over Galileo; on whether there can be a time-limited customs union; and on whether a miraculous new development can save the diesel car.