Come finance the huge ones investments contained in Draghi Report? Is it possible to create a European Debt Agency with the aim of both financing European Public Goods and strengthening the capital market, financial stability and the euro through the creation of a European Safe AssetIs it possible to think of an integrated approach between the issuance of European debt and the strengthening and/or creation of new European capitalization funds with industrial policy purposes?
The global geopolitical and economic situation is critical. Europe must give ambitious responses. In a climate of interest rates structurally bassi and high safe asset application it is time to plan in an integrated way a series of tools capable of giving us the strength necessary to increase the productivity, to promote the innovation and relaunch the industrial strength of our continent.
“With the Treaties unchanged, the Honorary Governor of the Bank of Italy reminds us Ignazio Visco, it is still possible to focus on pragmatic, less ambitious yet effective solutions. It is no longer possible to evade the need to provide the Union with an adequate common budget capacity. This would provide an instrument ready to be used in case of need, without having to resort to ad hoc programs each time, with uncertain outcomes: unsatisfactory as in the sovereign debt crisis or certainly effective as in the response to the pandemic. In addition to allowing for better management of unjustified market pressures and facilitating macroeconomic stabilization, this would open up decisive spaces, also with the issuance of “common” debt, for the provision of “European” public goods […] This is not a subversive statement. Economic theory and the concrete experience of other successful monetary unions, in particular the United States, suggest that the euro area would greatly benefit from the creation of a budget capacity at supranational level.“(Visco, 2023)
To do this, it is necessary, first of all, to reflect on a question recently raised by Mario Draghi: “Is it possible that Europe can continue the transition 'from a cyclical to a structural fiscal policy', opening a different, and perhaps more well-founded, path towards a fiscal union?” (Draghi.
Managing public debt in a low interest rate environment
In recent decades, we have witnessed a steady decline of the real interest ratesThis phenomenon is attributable to a question di superior savings atinvestment offer globally. The main causes of this imbalance include theaging of the population, the increase in inequalities, and a sharp increase in global demand, due to a growth of the global economy, driven by the China, far exceeding the supply of safe assets that advanced economies can offer.
The combination of low interest rates e low inflation has meant that, for many Western economies, excluding Italy, the differential between the real interest rate and the growth rate has been, over the years, and on average, negative. This means that the cost of serving the debt is lower than the economic growth rate, facilitating the stabilization or reduction of the debt/GDP ratio. This does not mean that public debts, which have grown to very high levels as a result of Covid, are not a problem. But that they are more manageable, provided that a responsible fiscal policy is maintained, constant coordination between central banks and governments to maintain the natural growth rate at levels that allow the economy to express itself to its maximum potential, and that dramatic "exogenous shocks" do not arrive.
Eurobonds: A 30-Year History
Di Eurobonds It has been discussed for thirty years, since Jacques Delors in his White Paper at the end of 1993 proposed the issuance of “Union Bonds” to finance European infrastructure, and especially telecommunications. Since then, proposals have multiplied, both from policy makers and from economists.
In 2011, during the sovereign debt crisis, the Council of German Economic Experts put forward the idea of a “Redemption Fund” to manage national debts exceeding 60% of GDP, but the proposal was rejected by the German Parliament. The German initiative has, however, stimulated a heated debate among economists and politicians. In 2021, the Governor of the Bank of Italy Ignazio Visco in his Final Considerations, he took up the concept again, suggesting the creation of a European fund which included at least the debts incurred during the two years of the pandemic. Mario Draghi ed Emmanuel Macron, with an article published on Financial Times in December 2021, they resumed and elaborated its proposal, supporting the need for transfer the debt in a new one European Debt Agency, although their objective was more oriented towards financing “expenses for the future”, rather than financial stabilization (Giavazzi et Al, 2021).
La Covid-19 crisis pushed the European Union to take a historic step, launching the programme Next Generation Eu (Ngeu) of 800 billion euros and Sure, a 100 billion euro employment support program. These instruments, financed by an expansion of the Union budget. However, the issues of securities linked to Ngeu and Sure, despite having obtained Aaa ratings, are not yet perceived by the markets as equivalent to German Bunds or French and Spanish bonds. They lack irrevocable guarantees, contributing to the spread compared to other European issuers. The problem is not, as many claim, only the lack of liquidity. The market "prices" the political fear regarding the permanence and very existence, in the long term, of the European Union, in addition to the fear that these are one-off programs.
We need to act with more ambition. The creation of a European safe asset, such as a European Debt Fund or the issuance of common bonds, as well as financing European Public Goods, would also represent an essential step for consolidate the banking union e of the capital markets. It would reduce the risk of flight to safety during economic crises, providing a more stable basis for the European financial system. It would also increase the effectiveness of the monetary policy of European Central Bank, facilitating the financing of automatic stabilizers shared between Member States. Finally, it would promote the euro as an international currency, increasing its use in global markets and strengthening Europe's role in the world economy. As was the birth of the European Central Bank, so too the creation of a European Debt Fund would give an important signal in strengthening the very concept of European sovereignty.
What role for European capitalization funds or institutions?
At the same time, it is necessary to strengthen the European capitalized financial institutions, such as the EIB, the EBRD, the CEB and the ESM and the others large national promotional banks (KFW, CDC, Bpi France, CDP, PKO). They represent a crucial element in supporting the investment capacity of Europe, especially in public-private projects, which are estimated at about two-thirds of the necessary investments. These institutions use a model based on paid-in capital (which is equal, according to a recent study by the World Bank, on average for multilateral development banks, only about 9%) and callable capital (equal to the remaining 91%, in the event, very unlikely that they will fail). They are characterized by low financial leverage (EIB from 2:1 to 3:1, the ESM 6:1), a high rating (AAA) and are considered to all intents and purposes European safe assets. Their cost, political and financial (due to the low paid-in/callable capital ratio), could make them easier solutions to implement.
In recent years several hypotheses have been put forward proposals to broaden the range of this type of European instruments. Ursula von der Leyen suggested in 2022 the creation of a European Sovereign Wealth Fund to support strategic sectors such as batteries, semiconductors and rare earth materials, crucial for the technological transition. In 2024, it proposed a European Hydrogen Bank to promote the development of hydrogen as a key element for the energy transition. Furthermore, the Financial Times recently reported that the EU is considering a European Defense Fund worth 500 billion euros, which could also include the UK.
Conclusions
La demand for public safe assets issued by advanced economies, in the world is in growth. Europe could afford to emit more of it to finance its future, especially the innovative industrial part and new technologies, which are those that contribute most to growth. It should be emphasized that in any case there is no "free lunch" and that spending more, even by borrowing at convenient rates, with the same tax burden, is a viable option, only if we manage to increase productivity and growth.
That said, in the geopolitical and economic scenario we are experiencing, Europe must give a strong signal about the stability and power of the EU in the long term. To do this, the ties between member states must be strengthened as much as possible. The implementation of the proposals we have discussed, in one form or another, would be one of the master solutions to relaunch the role and the very existence of Europe in the world over time. If it is true that Europe does great things only during the worst crises, it seems to us that the times we are witnessing are such that they can spur it to be much more courageous.
****The author is an economist, professor at Luiss, member of several Italian and international think tanks and former Chief Economist of Cassa Depositi e Prestiti
