We use cookies to help improve and maintain our site. More information.
close

January 18, 2018

A Franco-German blueprint for eurozone reform

With the German coalition pre-agreement, we now have Germany and France potentially agreed on the need for bold reforms of eurozone governance. Yesterday the CEPR released a complementary policy paper by a group of 14 German and French economists which lays out a detailed proposal for eurozone reform. While the authors claim to avoid political judgements, their six main proposals are peppered with political considerations. The choice to approach fiscal policy from the point of view of debt reduction and to exclude all discussion of the countercyclical stabilisation function of public spending is political. So is the choice of market discipline over prudential supervision as a crisis-prevention framework, and the focus on avoiding moral hazard and permanent fiscal transfers. Both of which are political.

But these economists are nevertheless making an honest attempt at bridging the German and French political-economy positions. Given the balance of power in the EU, this is as good as it's going to get. As Henrik Enderlein (@HenrikEnderlein) puts it on twitter, both countries will have to cross some of their red lines, and any push for more risk-sharing will be met by a counter-push for more discipline.

The paper focuses on solving three problems: 

  • Breaking the doom loop between banks and governments - we recall this was promised by the European Council in 2012!
  • Fixing the eurozone's fiscal architecture as the fiscal rules are divisive and ineffective at actually reducing debt; and
  • replacing the current crisis management by means of crisis loans with tough policy conditionality, which has fuelled nationalist and populist resentment in creditor and debtor countries alike.

To do this, the authors make six policy proposals that should be implemented as a package. Just implementing some of them will not achieve the desired objectives. The proposals are:

  1. Breaking the doom loop through a combination of bank capital charges for banks' concentrated exposures to governments, and a common deposit reinsurance. Also, bank resolution should be streamlined, bail-in mechanisms strengthened, and regulatory standards further harmonised. Supervision should focus on reducing nonperforming loans.
  2. Replacing the fiscal rules based on the structural deficit by an expenditure rule on a long-term debt-reduction trend. Violations of the spending limits should be financed by governments issuing junior bonds with a clause to extend their maturity in the event of an ESM programme, as a way to introduce market discipline.
  3. Introduce the necessary structures for government debt restructuring, by breaking the doom loop as above, creating (unspecified) stabilisation tools and a euro area safe asset as below. In addition, governments undergoing a restructuring should be protected from hold-out investors. The ESM should not bail out countries with unsustainable debt loads.
  4. Creating a auro-area fund financed by the member states to help absorb large asymmetric shocks. To avoid permanent transfers, countries more likely to draw on the fund would contribute more, and to avoid moral hazard, countries would take first loss before tapping the fund. They could only do this when they complied with the fiscal rules. 
  5. Creating a synthetic euro area safe asset - essentially a CDO of the government debt of participating member states. This has been previously known as ESBies (European Safe Bonds) or SBBS (Sovereign-bond backed secutities). The junior bonds referred to above would be excluded from this.
  6. Separating the fiscal decision-making from the surveillance, by creating an independent fiscal watchdog, possibly within the Commission. The eurogroup presidency could be assigned to the commission, following the model of the high representative for the common foreign and security policy. 

All in all, there is very little new in this paper: it is a condensation of what has been an emerging consensus for the past several years. Or, if not a consensus, at least what's left after taking into account all the various red lines, but mostly Germany's. It is not clear that you need economists to come up with something like this. Politicians, lawyers, or civil servants would have agreed broadly the same. Also, despite the protestations that this is not a political paper, this is clearly written with a certain set of political constraints in mind, as well as some favourite concepts of economists which are at heart political, too. And what is politically possible is largely determined by what economists have spent years whispering in the ear of politicians: risk-sharing, market discipline, moral hazard, debt sustainability, you name it.

As to the specific proposals, a concentration charge for banks is a good idea because it does not put a capital cost on the bulk of the government debt holdings but excludes a first portion of them. However, as with a uniform capital charge, this will disproportionately impact countries with high debt loads such as Italy. Despite the fact that the paper recognises the current fiscal rules as opaque and divisive, what they propose can be no less divisive. Debt sustainability, admittedly more tangible than the structural balance but still a matter of judgement, determines who gets to benefit from various schemes, or how much is paid into them. Reinsurance mechanisms require contributions on the basis of "likelihood to use" determined by whom? Or drawn from sovereign CDS spreads? And, finally there is really no concept of macroeconomic stabilisation worth its name in all of this. Not to speak of the faith in structured finance to produce a safe asset out of unsafe assets, as opposed to a debt-issuing EU treasury with its own tax-raising capacity, which would actually produce a safe asset.

Show Comments Write a Comment

January 18, 2018

Philippe's controversial airport decision

Éduard Philippe decided on one of the most explosive projects of the French government, and announced that there will be no new airport in Nôtre-Dame-des-Landes, near Nantes in western France. This controversial decision has been put off by earlier administrations for the last 40 years. There is a trail of 179 legal decisions, strong lobbying by some local authorities, and land being occupied by protesters who refused to leave and settled in as a community instead. Philippe himself was in favour of building the airport before becoming Macron's prime minister. So, what explains his U-turn? There are many who claim to know, but most probably the decision cannot be boiled down to one or two reasons. In his speech yesterday Philippe gave a simple one: it is a very divisive project. After 110 consultations with locally elected officials, he came to this conclusion and agreed it with Emmanuel Macron, admitting that he hesitated as never before until the very last moment. Philippe also had to defuse two most-dangerous accusations: the first, propelled by the press and by conservative politicians, is that Macron's government gives in to the protesters; the second is that he sacrifices the region's development for the government's own interest, and ignores the public referendum in favour of the airport. To counter this, Philippe announced that the land occupiers will have to leave it, by force if necessary, and that the existing airport will be extended. Whether this will be enough remains to be seen. What is clear, though, is that Philippe stepped out of the shadow of Macron to assert his own authority.

Show Comments Write a Comment

This is the public section of the Eurointelligence Professional Briefing, which focuses on the geopolitical aspects of our news coverage. It appears daily at 2pm CET. The full briefing, which appears at 9am CET, is only available to subscribers. Please click here for a free trial, and here for the Eurointelligence home page.

 

Recent News

  • July 05, 2017
  • Europe’s next migration crisis
  • Philippe: French need to kick spending addiction
  • November 28, 2016
  • And now what Monsieur Fillion?
  • The inescapable logic of an interim agreement
  • On Germany's foreign policy post-Trump
  • How to lose against the populists
  • April 25, 2016
  • The death of the Grand Coalition
  • Insurrection against TTIP
  • Juppé to benefit from Macron hype
  • On optimal currency areas
  • Why the Artic region could be the next geopolitical troublespot
  • From a currency to a people
  • April 09, 2018
  • Orbán gets his supermajority
  • Riding the wave of resistance
  • The EU’s self-defeating strategy
  • October 09, 2017
  • UK is starting to prepare for a no-deal Brexit
  • Why Germany will resist meaningful eurozone reform
  • April 13, 2017
  • Did Russia influence the Brexit vote?
  • All good between Germany and the US now?
  • October 18, 2016
  • The self-destruction of Francois Hollande
  • Brexit psychotherapy
  • At least three candidates for the PvdA leadership
  • The unbelievable hypocrisy of Mario Monti
  • April 25, 2016
  • The death of the Grand Coalition
  • Insurrection against TTIP
  • Juppé to benefit from Macron hype
  • On optimal currency areas
  • Why the Artic region could be the next geopolitical troublespot
  • From a currency to a people
  • May 25, 2018
  • Rejected by US, Germany is turning towards China...
  • ...and France is turning to Russia
  • UK ties Galileo to security partnership
  • Germans are discovering miniBoTs
  • January 17, 2018
  • Labour smashes No Brexit dreams
  • A new political bargain in Portugal?
  • September 13, 2017
  • Why the Turkey negotiations will continue
  • May 10, 2017
  • PSOE primary campaign in full swing
  • Czech government crisis escalates
  • Backroom dealing on electoral reform in Italy
  • January 05, 2017
  • French Socialist primaries - old wine in new bottles
  • Le Pen's hard ecu
  • Will Tusk get a second mandate?
  • Themes of 2017
  • August 25, 2016
  • The costs of Brexit
  • Redefining corruption
  • Greek government shocked, shocked...
  • The costs of Brexit
  • Redefining corruption
  • Greek government shocked, shocked...
  • April 25, 2016
  • The death of the Grand Coalition
  • Insurrection against TTIP
  • Juppé to benefit from Macron hype
  • On optimal currency areas
  • Why the Artic region could be the next geopolitical troublespot
  • From a currency to a people
  • September 10, 2018
  • Steadfast Juppé stays true to embattled Macron
  • Sweden’s Democrats and Germany’s AfD: they don’t win elections, but they set the political agenda
  • Is Boris going to challenge Theresa May?
  • August 20, 2018
  • ... and a subtle shift in EU policies towards both Russia and Turkey
  • Nothing to celebrate about the end of the bailout programme
  • Support for Brexit holding up
  • August 01, 2018
  • EU softening stance on Brexit
  • July 13, 2018
  • Can Spain's PP turn eurosceptic over Catalonia?
  • June 25, 2018
  • Trump's car tariff to come early
  • On the lack of a sharp focus in the eurozone debate
  • June 08, 2018
  • German car lobby in full panic mode - wants EU to cut car tariffs unilaterally
  • Turkey suspends migrant deal with Greece
  • Is Macron losing the left?
  • May 23, 2018
  • Mattarella’s limited options
  • May 08, 2018
  • Macron and the technocratic republic
  • Philippe's silent offer to the SNCF unions
  • On the ordoliberal utopia of a debt-free state
  • April 23, 2018
  • More bad news for the SPD
  • Will Theresa May accept a customs union? The Times says yes. We think so too.
  • A comeback for Marine Le Pen?
  • April 09, 2018
  • Orbán gets his supermajority
  • Riding the wave of resistance
  • The EU’s self-defeating strategy
  • March 26, 2018
  • On the run no more
  • Terrorist attack will challenge Macron
  • A double-whammy of geopolitical and financial uncertainty
  • March 16, 2018
  • Pellegrini to succeed Fico
  • Slovenia may go to early elections in late May
  • The case for crypto-currencies
  • March 07, 2018
  • The PD - so much like the SPD
  • Why the EU is right to blackball the City of London
  • Car companies don't deliver on diesel upgrades
  • February 26, 2018
  • Angela Merkel's cabinet
  • February 19, 2018
  • SPD divided over grand coalition
  • Wauquiez - the French Trump?
  • Why Brexit will be extremely hard to reverse
  • February 12, 2018
  • What the euro debate is really about
  • How Brexit can still falter
  • February 05, 2018
  • How big is Germany's external surplus, really?
  • Macron's first election test
  • Coeure's endorsement of a fiscal union
  • January 29, 2018
  • Where is the opposition in France?
  • Scenarios and risks for Syriza over Macedonia
  • January 25, 2018
  • About political leadership in the 20th century
  • Progress in name dispute talks and new opposition at home
  • About 40% probabilities
  • January 22, 2018
  • Carles Puigdemont's flying circus
  • Macedonia and the insurrection of Greek patriotism
  • On the real hurdles for Brexit revocation
  • And the satellites, too
  • January 19, 2018
  • On the futility of discussing the German current account surplus
  • The Brexit revocation madness
  • Varadkar, the enfant terrible in the Brexit negotiations