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July 31, 2018

Much ado about nothing - French version

Today Édouard Philippe will have to appear in the assembly to respond to two censure motions that opposition parties handed in over the Benalla affair. So far Philippe was silent in this affair, since after all it is about the inner workings of the Élysée palace and not the political direction of the government. There are already two committees of inquiry, one in the assembly and one in the senate, dealing with this affair. And on top of that the opposition parties are now puting two censure motions on the table. 

To those who consider the Benalla affair as nothing but a summer scandal, this seems way over the top. The censure motion will not end the French government, nobody expects that. So why hand one in? Just to record their disapproval how the scandal is being dismissed by Philippe as a summer story and not a state affair? Or to draw Philippe in and use the scandal to criticise his policies? 

Censure motions are not rare in French politics though they never succeeded except once in 1962. It is the first time for Emmanuel Macron's government, though, and the first time since 1980 that two motions are discussed at the same time in the assembly, recalls the Nouvel Observateur

Olivier Auguste suggests in L'Opinion that the only reason for this is that it closes the political ranks on the right and the left: One censure notion was handed in by the Republicans, whose members for once can forget about their internal struggles with the constitutional reform. The other censure motion comes from the left, backed by the Socialists, the Communists and La France Insoumise. But it pulls together the ranks behind Macron too. And the prime minister's office sees this double motion as a golden opportunity to close the political chapter of the Benalla affair once and for all.

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July 31, 2018

Eurozone reform: Purple bonds

Lorenzo Bini-Smaghi and Michala Marcussen have a safe-asset proposal in VoxEU which they call purple bonds, by analogy with earlier suggestions to call Maastricht-compliant debt blue, and debt above the 60% GDP limit red. Their proposal is interesting in that it limits its treaty-change implications to the ESM treaty which the European Council is in the process of reviewing anyway. Also, it makes good use of the idea to introduce debt-restructuring into European government debt, which we note was part of the Meseberg declaration by Angela Merkel and Emmanuel Macron. The purple-bond proposal also blends in the fiscal compact's debt brake requiring states to eliminate their non-compliant debt within 20 years. 

The key part of the Meseberg declaration is the somewhat obscure 

"To improve the existing framework promoting debt sustainability and to improve their effectiveness, we should start working on the possible introduction of Euro CaCs with single-limb aggregation."

In this mouthful, collective-action clauses are a euphemism for debt-restructuring clauses pre-written into bond covenants at the time of issue. Collective action refers to the need for a suitable fraction of creditors to collectively agree to the debt restructuring, the pre-existing clause then preventing legal challenges by hold-outs. Single-limb aggregation means that all the different bond issues are restructured together, instead of separately. 

What Bini-Smaghi and Marcussen are proposing is that existing debt be labelled purple. This would then be subject to the fiscal compact's debt brake. A country could only issue new purple debt - without collective-action clauses - if it falls below the 20-year debt-reduction trajectory. Any additional debt that a country needs to issue would be labelled red - subject to debt restructuring.

The limited treaty change that this proposal would require is for the ESM treaty to enshrine the purple/red distinction. The ESM would be given the ability to restructure member states' debt, but only the new red part. 

After a twenty-year transition period, the authors suggest, the by-then Maastricht-compliant purple-debt stock could be mutualised into a true eurobond. Hopefully twenty years from now the political reticence seen over the past ten years will be a thing of the past.

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