DNB/IMF Workshop 13-14 October 2011

Can Eurobonds be an Effective Economic Instrument in the Euro

Area?

Fabian Amtenbrink (Erasmus University Rotterdam)

Jakob de Haan (DNB & University of Groningen)

amtenbrink@law.eur.nl jakob.de.haan@rug.nl

Structure of the paper and this presentation

• The flawed Maastricht system of economic governance in EMU…

• … and the limited effect of the ‘six-pack’

• Can Eurobonds become a more effective economic instrument in the euro area?

• What are the legal hurdles for the introduction of Eurobonds?

• Some preliminary conclusions

Paper and presentation reflect

Work in Progress!

The flawed Maastricht system of economic governance in EMU (1)

• Regulatory gap between economic policy coordination and single monetary policy in the euro area

• Regulatory gap between multilateral surveillance and excessive deficit procedure

• Neither primary Union law nor Stability and Growth Pact offer effective instruments to enforce compliance with BEPGs and Stability/Convergence Programs

The flawed Maastricht system of economic governance in EMU (2)

• Decision-making is political process

• Excessive deficit procedure is hardly enforceable

• Response to euro

area sovereign debt

crisis has moreover

resulted in a shift in

paradigm

The recent reform (the six-pack)will not fundamentally change the equation

• Reform package does not constitute the ‘fundamental shift in economic governance’ announced by European Council

• Most notable change is new focus on macroeconomic imbalances, including sanction regime

• New sanction regime for the multilateral surveillance & excessive deficit procedure cannot repair birth defects in Article 121 and 126 TFEU

• Last-minute political bargaining has partly weakened innovation of reversed voting in multilateral surveillance procedure

What way forward in economic governance in the euro area?

• Fundamental reforms will have to satisfy two basic conditions:– Effectiveness: system ensures fiscal discipline and rule

out speculation against individual countries– Feasibility: extent to which a reform implies a further

(undesired) transfer of policy and decision-making power from the national to the supranational level

• Could a European system of debt financing be an effective and feasible way forward?

Introducing Blue Bonds and Red Bonds – the Delpla and von Weizsäcker Proposal

• Delpla and von Weizsäcker (2010; 2011): a system of Blue and Red Eurobonds

• Sovereign debt up to 60% theshold covered by European bonds jontly-and-several guaranteed by the participating Member States (blue bonds)

• Independent new Stability Council charged with allocating blue bonds

• Member States are allowed to issue own debt instruments beyond the 60% threshold (red bonds with junior status)

• No EU bail-out for red bonds!

Introducing Eurobonds next to national bonds - a good idea?

• Introduction of system of EU guaranteed bonds next to national debt bonds creates perverse incentives on parts of Member States

• How credible is a no-bail-out clause for red bonds in the light of past experience with current system?

• Market speculation against individual countries remains a possibility as countries are still allowed to issue own debt instruments (rescue mechanisms remain thus necessary)

Compatibility of Eurobonds with (existing) Union law

• What legal basis for the introduction of a Eurobond system?– Articles 121/126 TFEU– Article 136(3) TFEU– A new provision in primary Union law?

• Would the introduction of Eurobonds be in breach of primary Union law? – General principle of debt financing at market conditions– Articles 123/124 TFEU– Article 125 TFEU = no-bail-out clause

Compatibility of Eurobonds with national constitutional law

• Constitutional objections arising from the loss of budgetary power of national parliaments– E.g. decision by German Federal Constitutional Court on German

financial aid to Greece and participation in EFSF– References by several highest courts in other Member States to

‘constitutional identity’

• Constitutional objections arising from the existence of constitutional debt ceilings – Joint or joint-and-several liability = debt ?– How to take deal with risks arising from liability?

Some preliminary conclusions

• Economic governance in EMU has failed to attain the basic economic objectives of EU

• Fundamental reorientation called for!

• Proposal of Blue and Red Bonds does not solve fundamental problems in the sphere of economic governance

• Countries may actually regain

sovereignty from financial markets!

THANK YOU !