Francesco Marchionne's proposal – to divide public debt into tranches colored according to credit risk – which was published by Firstonline on August 23 (“Red, yellow and green debt: how to make Eurobonds flexible“) now accepts the “fact” that the sovereign debts of the so-called PIIGS countries are at risk and shifts the discussion to the best management of this risk. From a financial technical point of view, the proposal is based on two principles. The first is to transform a national public debt, with a single risk premium, into tranches with different risks and therefore different returns. The second is to "pool" the less risky tranches, the green ones, on the basis of which a new European institution would issue a European bond with a strong credit rating and a high degree of liquidity.
The latter property could reduce the yield of this bond below the weighted average of the green bonds underlying the Eurobond. Marchionne's idea proposes, in a more complex way, the proposal made last year by the Bruegel Institute (“The Blue Bond Proposal”, May 2010). The theme is taken up by last week's Economist with the title of “unpleasant-tasting solution” (An unpalatable solution, page 70). Why is the proposal unpleasant? Because it would lead directly to fiscal union and would not be digestible to member countries with high fiscal discipline, with Germany in the lead.
Although the "pooling" technique creates advantages in terms of the cost of borrowing, a subsidy from high-disciplined countries to low-disciplined countries cannot be avoided unless the former impose fiscal policy on the latter. But the commissioning of the PIIGS countries by the more disciplined ones would not be credible if it were not legitimized by the voters who spontaneously, and after a long debate, decide that it is in their interest to outsource those decisions that up to now have matured (and jealously kept) in the local corridors of national politics. The discipline "suggested" today by the European Union and the European Central Bank to the PIIGS translates, due to the need for time, into reductions in the fiscal impulse which has a negative effect on economic activity, thus aggravating the sustainability of the sovereign debt.
The commissioner could create a virtuous circle if it acted immediately on the snares and snares that weigh down the economies at risk. But we note that governments are unable to untie those ties and snares that have as a counterpart benefits and positional rents obtained with long and industrious lobbying activity. Could the highly disciplined countries do it through a national commissioner? I don't see that likely. I see it more probable that highly disciplined countries will come to the awareness that it is worth saving the euro and paying the duty of a fiscal union with a good deal of transfers to their cousins in the Mediterranean area.
* Economist and lecturer at the Indiana University Kelley School of Business and at the Marche Polytechnic University
