L.Bini Smaghi, M. Marcussen – Strengthening the euro area ArchitectureL: A proposal for Purple bonds
The euro area is currently facing a dilemma. While it is widely recognized that its architecture needs to be strengthened, some of the key proposals to achieve this goal encounter political difficulties. Genuine Eurobonds with joint and several liability would bring significant economic benefits and stability. However, they would require transfer of sovereignty on fiscal policy from the member states to the euro area, something that does not appear to be politically feasible in the foreseeable future. On the other hand, just keeping the status quo exposes the fragility of the euro area in the event of a new crisis. Several authors have sought to address this dilemma through various proposals. This paper presents our contribution to the debate.
Essentially, we propose to lever on the Fiscal Compact’s requirement to reduce the excess general government debt above 60% of GDP by 1/20 every year, in order to adapt the Blue- Red bond proposal by Delpla and von Weizsäcker (2010). The amount of debt consistent with the Fiscal Compact would be “Purple” and protected from any debt restructuring demands under an eventual ESM programme. Any excess of debt over the Fiscal Compact limit would be “Red”, and would not benefit from the no-restructuring guarantee. We believe that this proposal would protect the existing national bond stock from disruption, encourage fiscal discipline, lower funding costs for the periphery, strengthen bank balance sheets, maintain market access under an ESM programme, thus reducing the eventual burden on ESM funds, and potentially increase the effectiveness of the ECB in the implementation of monetary policy. At the end of the 20-year period, when Purple bonds will stand at 60% of GDP, these could be transformed into Blue bonds and eventually become genuine Eurobonds if there is the political will to do so at that time.