2018/20 | LEM Working Paper Series | ||||||||||||||||
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Making the Eurozone work: a risk-sharing reform of the European Stability Mechanism |
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Giovanni Dosi, Mauro Minenna, Andrea Roventini, Roberto Violi |
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Keywords | |||||||||||||||||
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Sovereign Debt, Risk-Sharing, Insurance Fund, ESM, ECB, OMT, QE, CDS
spread, Investments’ Multiplier, Bond-Market Discipline, Safe Asset
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JEL Classifications | |||||||||||||||||
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E02, G01, H12, H63
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Abstract | |||||||||||||||||
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This work presents an original proposal for the reform of the Eurozone
architecture according to an approach based on risk sharing (aiming to
reach in the long-term the mutualization of public debt). The proposal
envisages a new role for the European Stability Mechanism (ESM) which
should gradually become the guarantor of the public debts of the
EMU. In this way, the new ESM would support the full transition from
national debts to a single Eurozone public debt (e.g. Eurobonds) with
a single yield curve for all countries. Our proposal would benefit
both core and peripheral EMU countries. Indeed, the riskiest
countries, which would gain from the ESM conditional debt guarantee,
should give up the possibility of redenominating their national debt
and would pay to the ESM the corresponding market price of the
guarantee. This would strengthen the capital endowment of the ESM and
also allow it to use its leverage capability to support the
realignment of the economic cycles of the different countries through
profitable public investment plans concentrated in the weakest regions
of the EMU. Such plans would be coordinated and implemented by the
European Union. After a transition period, our Insurance Fund proposal
would contribute to a much more resilient monetary union, with a
European fiscal policy and debt. Admittedly this proposal presupposes
a political consensus at the EU level to reinterpret to the no bailout
rule enshrined in the treaties so that risk sharing institutions
implemented with fairly priced insurance scheme can be allowed. New
risk sharing institutions will foster a common vision of belonging to
the same federal, political union in the making, the only one
compatible with the abdication of fiscal sovereignty by national
governments.
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