The completion of EMU, and banking union as its critical component, requires that certain taboos in the policy debate are brought out in the open. First, the Commission must stop pretending that Italian public debt is sustainable under current policies and shift from politically motivated forbearance to serious implementation of the SGP and notably its debt rule. Second, it is necessary to acknowledge that crisis management by the ESM is crippled as long as its financial assistance can only be granted after the country in need is close to losing market access and, in addition, this threatens the financial stability of the entire euro area. The already-existing alternative to assist a country that is not respecting the SGP is to utilise the enhanced conditional credit line (ECCL) introduced by the ESM reform, approved by the European Council and awaiting national ratifications, in order to agree on a full-fledged adjustment programme before any euro area member (Italy) comes to the brink again – without any preventive conditions on the sustainability of public debt. And, third, the completion of the banking union requires a reduction of banks’ home sovereign portfolios, that can be incentivised by the introduction of mild concentration charges. However, the system will not work without simultaneously offering the banks and financial investors in general a true European safe asset, fully guaranteed by its member states. Our proposal is that such a safe asset could be offered by the ESM, which would purchase in exchange the sovereigns held by the ESCB as a result of the quantitative easing asset purchase programme. The risk of losses on these sovereigns would continue to lie with the national central banks, thus avoiding the transfer of new risks to the ESM.

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