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August 23, 2011

EuroUnionBond, here is what must be done

by Romano Prodi and Alberto Quadrio Curzio


To the Editor:

We appreciated the attention il Sole 24 Ore placed on subject of Eurobonds (EBs), which were recently rejected by the Merkel-Sarkozy summit held August 16th since France and Germany fear they would have to pay the debts of other States. We on the other hand feel EBs would help unity, stability and growth of the Economic and Monetary Union, the euro and therefore of the EU. However EBs have to be well planned starting from an economic and institutional layout that we will apply hereinafter (without reference to other layouts, except for one by Quadrio Curzio on Mulino 2/2011).  We identify four generically defined types of EBs, of which only one has been implemented: StabilityBond (SBs), while two other have been proposed for some time now – UnionBond (UBs) and EuroBond (EBs), but have not yet been implemented. Finally we will present our proposal that we define as EuroUnionBond (EuB)

UnionBonds (UB). These long-term “European” public debt securities were proposed by European Commission President Jacque Delors in the White Paper for Growth, Competitiveness and Employment in 1993. UBs would have been guaranteed by the European Community budget to finance investments in big trans-European infrastructure projects, whose proceeds would have gone to the promoters of the self-same projects (public sector bodies, privately held companies) burdened by interest payments and refunding UBs. This proposal has often been picked up on, recently also by the European Parliament.

A limited variant of UBs are “ProjectBonds” (PBs) supported by Josť Manuel Barroso and by the European Commission in 2010 to carry out single European infrastructure projects with public-private financing. PBs would be issued by private subjects but guaranteed by the Community budget and by the EIB. Some have already been issued by the EIB and the “Marguerite Fund”, which has been operational since 2008 with its “core sponsors” being the French, German, Italian, Polish and Spanish Deposits and Loan Fund or similar bodies and the EIB. These are minority interests in new European infrastructure projects for transportation, energy and renewable energy.

EuroBonds (EBs): these European public debt securities were presented as a way to restructure national public debts of EMU member States. Many of us promoted them while other criticized them. In December 2010, two Finance Ministers, Jean-Claude Juncker (president of the Euro-Group) and Giulio Tremonti launched the idea on the Financial Times. They started by saying that despite the decisions of EU and EMU institutions, public debt markets of euro-area member States are still attacked and are attackable. To contrast this there should be EBs issued by a European Debt Agency (EDA) as a successor to the European Financial Stability Facility (EFSF). Delors, like others, criticized this sort of measure “just to make up for the deficits of the past”.

StabilityBonds (SBs). They have already been implemented. Since August 2010, the EFSF (European Financial Stability Facility) has been operational with up to 440 billion of committed capital to issue securities to use for conditional loans for Euroland member States undergoing financial crisis. The shares of the capital of the Fund are proportionate to those that EMU member States have in the ECB. Germany therefore guarantees for some 27%, France 20%, Italy almost 18%. That is 65% of the EMU. For now, this Fund has just issued 13 billion SBs for loans to Portugal and Ireland. A subsequent broadening of the scope of the Fund, including amendments decided in July, increased to 780 billion the guaranteed capital and conferred to the EFSF other powers. In particular, the Fund will be able to buy public debt on the primary and secondary markets of EMU member States in difficulty as long as they are undergoing financial restructuring. The broadening of the scope is to date subject to the ratification of the States that are shareholders of the Fund. Therefore for now the Fund can just issue loans. From July 1, 2013 the EFSF will be replaced by the European Stabilization Mechanism (ESM) a permanent rescue funding program with 700 billion euro of paid- up capital, which will have to be acknowledged by European Treaties. Summing up: SBs are an important novelty even if how they operate is limited to defensive rescue measures.
EuroUnionBonds (EuBs). We argue that further innovation is necessary with a European Financial Fund (EFF) that issues EuBs with four characteristics that include some of those mentioned above.

1) EMU member States should confer capital to the EFF in proportion to their stakes in the ECB. The capital should be constituted by gold reserves of the European System of Central Banks, the largest in the world with some 350 million ounces, worth around 450 billion euro. To place gold as collateral, the Bylaws of the ESCB and of the ECB would have to be amended (with an impact also on European Treaties, but not on the Central Banks Gold Agreements that deal with gold sales). These institutions could therefore become shareholders of the EFF as they are the ones conferring assets. Assuming the capital paid up to the EFF is of 1,000 billion euro, each EMU member State will have to confer in addition to gold, other assets like bonds and shares assessed at real market values and not at devalued market values. Italy should confer a total of 180 billion, of which 79 million ounces of gold reserves, valued to date at some 101 billion euro, plus another 79 billion euro that we think should be made up of shares of companies held by the Finance Ministry (Eni, Enel, Finmeccanica, Poste, etc). Companies that to date, considering market prices, cannot be privatized. These conferrals should eliminate German fears of having to pay for other States’ debts. Germany would have to confer to the EFF 270 billion euro, of which 140 billion from 109 ounces of gold and 130 billion in other assets. France would have to pay 200 billion of which 100 billion with 78 million ounces of gold and 100 billion with other assets. It would be important that Italy, Germany and France in addition to gold, confer shares in companies in homogeneous sectors in energy, telecoms and transportation.

2) The EFF with 1,000 billion of paid up capital could issue 3,000 billion of EuBs with a leverage of 3 and a 10-year (and beyond) duration at an interest rate of 3%, possibly variable rate after a certain period of time. There could be further guarantees with legal commitments from EMU member States. The 90 billion euro per year of interest charges, to date equal to some 1% of GDP of the EMU, would be payable with the profits from the equity conferred to the EFF, part of the VAT of EMU member States and with interests that we will talk about later. Obviously, adjustments can be made in terms of interest rates, maturities, refunds of the EuBs and maybe that they could be converted into shares. But this is the essence.

3) The EFF should divide in two parts the 3,000 billion raised with EuBs. In order to bring the average debt-to-GDP ratio of the EMU from the current 85% to 60%, the EFF should buy out 2300 billion of State bonds from EMU member States. This way, Italy’s debt towards the market would fall to 95% of GDP while the remaining 25% of debt would be towards the EFF. France and Germany’ debt/GDP ratio would drop to under 60% towards the market. The remaining 700 billion of this issue would go to investments in large European projects aimed at unifying and helping continental companies in the energy, telecoms and transportation sector, of which the EFF would become a shareholder, grow.

The advantages of this EuB issuance would be huge. We will cite just two: The first is that the EFF would not be opportunistic but rather a stabilizing factor in managing State Treasury bonds to hold on to for long periods of time, making speculation much more difficult. The second advantage would be having a unified market of large-scale EuBs and raising funds at lower average interest rates compared with those that national bonds of almost all EMU member States can obtain. Considering the nature of the EFF and of EuBs, which have real collateral, it would be realistic to attract very liquid investors like sovereign Funds that it is estimated have to date assets of some 4,200 billion dollars, or some 3,000 billion euro that no EMU member State issuance can cover if not just marginally. This way, EuBs can really become competitive compared with US Treasury bonds, which China wants to lighten up on.

Obviously, the EFF has to have a precise structure and corporate governance system (that could in part be taken from the EFSF and the ESM), including voting rights of EFF members, which, even though subject to their share in the capital, should be reviewed periodically in order to take into consideration by how much single States exceed the 60% debt/GDP threshold. This way, the different States would be pushed to bring down their debt/GDP ratio.
Summing up: this innovation should be planned immediately because, considering the legal terms of the EMU (and of the EU), the Eurozone is running serious risks. Those of speculation, of budget rigor with no growth and employment, of the Franco-German diarchy that took on itself the role of governing the EMU and the UE, while not being able to match up to a Government capable of the great political and institutional projects out in the past. (Traduzione di Yael Schrage)


August 23, 2011