REPORT on the feasibility of introducing Stability Bonds

6.12.2012 - (2012/2028(INI))

Committee on Economic and Monetary Affairs
Rapporteur: Sylvie Goulard

MOTION FOR A EUROPEAN PARLIAMENT RESOLUTION

on the feasibility of introducing Stability Bonds

(2012/2028(INI))

The European Parliament,

–   having regard to the enhanced economic governance framework of the Union, including the six-pack, Parliament’s agreed-upon proposals for the two-pack and the fiscal compact;

–   having regard to the two reports of the President of the European Council entitled “Towards a Genuine Economic and Monetary Union” issued on 26June 2012[1] and 12 October 2012[2], respectively;

–   having regard to the conclusions of the European Council of 28-29 June 2012 exploring ways of improving the economic and financial architecture of the eurozone[3];

–   having regard to Article 125 of the Treaty on the Functioning of the European Union (TFEU);

–   having regard to its resolution of 18 November 2008 on the theme ‘EMU@10: The first 10 years of Economic and Monetary Union and future challenges’[4],

–   having regard to its resolution of 6 July 2011 on the financial, economic and social crisis: recommendations concerning the measures and initiatives to be taken[5],

–   having regard to the Commission Green Paper of 23 November 2011 on the feasibility of introducing Stability Bonds (COM(2011)0818),

–   having regard to its resolution of 15 February 2012 on the feasibility of introducing Stability Bonds[6],

–   having regard to the roadmap annexed to this resolution,

–   having regard to Rule 48 of its Rules of Procedure,

–   having regard to the report of the Committee on Economic and Monetary Affairs and the opinions of the Committee on the Internal Market and Consumer Protection and the Committee on Legal Affairs (A7-0402/2012),

A. whereas Parliament requested that the Commission submit a report on the possibility of introducing eurobonds, which was an integral part of the agreement between Parliament and the Council on the economic governance package (six pack);

B.  whereas the Green Paper launched a broad public consultation exercise concerning the concept of stability bonds; whereas the Green Paper assesses the feasibility of common issuance of sovereign bonds by the Member States of the eurozone and discusses the required conditions;

C. whereas, without overlooking the broader Union perspective, the eurozone is in a unique situation, with participating Member States sharing a single currency but no common budgetary policy or common bond market; whereas, therefore, there are grounds for welcoming the draft proposals in the two reports entitled ‘Towards a Genuine Economic and Monetary Union’ presented by the President of the European Council, which represents a good starting point for working towards a sound and genuine EMU;

D. whereas Article 125 of the TFEU prohibits Member States from assuming liabilities of other Member States;

E.  Whereas monetary policy engaged by the European Central Bank (ECB) is not the solution to the fiscal and structural problems of Member States, and its non-standard measures have limits in their effectiveness.

F.  whereas no federal state (including the United States and Germany) issues the equivalent of eurobonds such as foreseen in options 1 and 2 of the Green Book, something which elevates eurobonds to the level of a totally new concept that cannot be compared with the tried and trusted US Treasury Bonds and German Bundesanleihen;

G. whereas Member States face difficulties in accessing financing at reasonable rates as a result of the mistrust of the market with regard to public debt, the situation of European banks and the ability of European leaders to take definitive steps to defend and complete the single currency;

H. whereas the crisis has demonstrated not only the interdependence between eurozone Member States but also the need for a more robust fiscal union, with effective mechanisms to correct unsustainable fiscal trajectories, macroeconomic imbalances, debt levels and the upper limits of budget balance of Member States;

I.   whereas credible commitments to growth-friendly consolidation measures are a prerequisite for any sustainable solution of the excessive debt and deficit situation of most of the eurozone Member States;

J.   whereas the mutualisation of eurozone sovereign debt cannot per se compensate for the loss of competitiveness of the euro area;

K. whereas the common issuance of debt, with joint and several liabilities, and an enhanced fiscal integration, with budgetary discipline and control, are two faces of the same coin;

1.  Welcomes the various crisis mitigation and resolution efforts, and underlines the new reinforced EMU governance framework, the latest agreements reached regarding the rescue funds and the decisions taken by the ECB; believes, however, that an agreement on a lasting solution is still needed in order to build a balanced approach that combines solidarity and responsibility within the euro area; recalls that three Member States outside the euro area have also received help to overcome their sovereign debt crisis;

2.   Remains extremely concerned about the ongoing euro area crisis and the threat it represents to the well-being of millions of people experiencing poverty and unemployment across the EU; points out that, in order to preserve the integrity of the Economic and Monetary Union, while pursuing structural reforms and developing a fiscal capacity for the euro area that could help absorb country-specific economic shocks or facilitate such structural reforms, alternative ways to maintain access to the markets, or to reduce the cost of borrowing for Member States, need to be found that do not rely solely on rescue mechanisms such as the ESM and EFSF;

3.   Welcomes the European Council’s decision of 30 June 2012 to explore ways of improving the economic and financial architecture of the euro area while avoiding moral hazard and achieving sound and sustainable public finances; considers that a long-term vision for a stronger Union needs to be built on enhanced democratic legitimacy, based on the Community method and accompanied by a time-bound roadmap;

4.  Notes that the European Financial Stabilisation Mechanism (EFSM), the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) are the most important firewalls designed so far by the EU; is mindful that the role of the ESM regarding solvency and ring-fencing issues should not be disregarded in the future; welcomes the commitment taken by the EU Council on 18-19 October 2012 that, when an effective single supervisory mechanism is established, involving the ECB, the ESM could, following a regular decision, have the possibility to recapitalise euro area banks directly;

5.   Stresses that a credible strategy for fiscal consolidation and structural reforms throughout all Member States are necessary to restore fiscal credibility, and are essential to achieve a sustainable balance of payments and sound and sustainable public finances; sound state finances are necessary for the introduction and functioning of a common debt issuance system;

6.   Welcomes the presentation of the Green Book, which fulfils a long-standing request of Parliament; considers that the introduction of stability bonds would be an operation at par in importance with the introduction of the single currency;

7.  Welcomes the fiscal consolidation and structural reform efforts undertaken by the Member States, and acknowledges the difficult and demanding efforts that are being requested from the European citizens; urges the Member States to continue to comply with commitments and agreements concluded in terms of fiscal consolidation, while taking due account of the macroeconomic context, and to improve their efforts to reduce excessive macroeconomic imbalances;

8.  Is deeply concerned, however, that despite the efforts at reform and consolidation made by Member States, investors and players on the financial markets fail to appreciate sufficiently the efforts made so far and continue to put speculative pressure on policies, which is reflected in widening spreads and high volatility;

9.  Believes that there is an urgent need to take action with a view to endorsing a longer-term strategy for the euro area which ensures sound public finances, sustainable growth, social cohesion and high levels of employment, while preventing moral hazard and supporting convergence by moving towards fiscal union; is pleased to note that the report presented by the Presidents of the European Council, the Commission, the Euro Group and the ECB has launched a debate concerning a comprehensive, ambitious and credible strategy;

10. Recognises the signs of distress showing on sub-sovereign debt markets and how they link to stress in the respective Member States;

11. Calls on Member States with large sub-sovereign debts to put in place mechanisms to issue common stability bonds that, linked to fiscal discipline conditionality, relieves sub-sovereign debt stress to levels equivalent to that of their Member States;

12. Welcomes the fact that the euro has risen to second place worldwide as a global reserve currency; points out that it is in the long-term strategic interest of the eurozone to draw every possible benefit from the single currency, such as the possibility of establishing a common liquid and diversified bond market and of reinforcing the euro as a global reserve currency; considers that this requires an integrated European financial, economic and budgetary framework;

13. Notes that an integrated budgetary framework is essential to ensure sound fiscal policy, encompassing coordination, joint decision-making, greater enforcement and commensurate steps towards common debt issuance, and that, currently, some of the proposed schemes of mutualisation of public debt may not be compatible with provisions of constitutional law in certain Member States;

14. Underlines that the current situation has induced, in the short run, a “flight to quality” (quest for the safest assets, even with very low returns), resulting in funding challenges for banks and other financial institutions;

15. Is concerned about banks holding large amounts domestic government bonds which is creating a perverse feedback effect when pressure on sovereign debt turns into pressure on banks; recalls that the diversification of assets and liabilities is a tool to ensure stability and one of the neglected advantages resulting from the internal market;

16. Stresses that all existing and future instruments or institutions which are sensu stricto or sensu lato part of the economic governance framework of the Union need to be democratically legitimised;

17. Believes that the prospect of common bonds may be a strong signal to financial markets, help preserve the integrity of the EMU, underpin a return to economic stability and reduce uncertainty, provided that progress is made with EU financial and budgetary integration and supervision; reiterates its position that sequencing is a key issue, involving a binding roadmap similar to the Maastricht criteria for introducing the single currency; asks for further clarification on the Commission’s proposal to make the common debt issuance conditional, e.g. on respect for the Stability and Growth Pact;

18. Recommends that the Commission define exit and entry criteria based on strong fiscal consolidation and budgetary discipline, while also taking into account the current crisis and the fiscal adjustments being pursued in a number of euro area countries;

19. Notes the positive and negative developments in the euro area since 1999 and stresses that interest-rate convergence for sovereign debt has created incentives for building up unsustainable debt levels; observes that, in the public and political debate, various possible ways of partially issuing common debt securities have been proposed, such as the pooling of certain short-term financing instruments on a limited and conditional basis (eurobills) or the gradual rollover to a European redemption fund;

20. Underlines that any move towards the common issuance of bonds should take the single market perspective fully into account, ensuring that no unnecessary obstacle or imbalance is created between participating and non-participating Member States;

21. Recalls that, even under a common bond issuance scheme, every Member State is obliged to pay back the entirety of its debt; recalls that common bond issuance is no guarantee against a Member State defaulting on its debt;

22. Believes that only commonly issued bonds, ensuring strict seniority status to bond holders, should be considered, in order to protect the EU taxpayers;

23. Acknowledges that inadequate competitiveness and a failure to undertake structural reforms are crucial factors, in real economic terms, in the continuing decline in the economic situation of a country;

24. Notes that most proposals for eurobonds include ways to reduce access to the bonds for Member States whose budgetary positions spin out of control; calls, therefore, for mechanisms to be maintained that are able to help Member States that are experiencing difficulties in the form of a liquidity crisis (as opposed to a solvability crisis) and that are excluded from the common issuance of bonds; believes that the ESM should be maintained for that purpose; believes that the ESM should be made subject to the Community method;

25. Asks the Commission to elaborate further on the criteria of allocation of the loans to the Member States, as the Green Book only states that this would be done ‘according to their needs’; insists that the capacity to service the debt should be one of the central allocation criteria;

26. Points out that the Commission’s Green Book states that the upper limit of 60 % of GDP in the blue bond proposals may be too high to insure the stability of the system, and asks for further clarification concerning that limit;

27. Believes that it is essential to establish a roadmap for finding, in the short term, an exit from the current crisis, and for moving, in the long term, towards a fiscal union by completing, strengthening and deepening the economic and monetary union;

28. Calls on the Commission as soon as possible to present a report to Parliament and the Council examining the options for, and making proposals for a roadmap towards, common issuance of public debt instruments, taking into account financial, budgetary and legal aspects; considers that, in this context and in parallel to the intermediary Van Rompuy report of 12 October 2012 , the Commission should pay particular attention to the feasibility of introducing a redemption fund which combines temporary common issuance of debt instruments, and strict rules on fiscal adjustmentamong those countries whose indebtedness exceeds 60 % of GDP, with the participating countries undertaking to make their repayments, in order to allow all participating countries to reduce excessive debt over a benchmark period of 25 years, which is a longer period than provided for in the renewed Stability and Growth Pact but which likewise, in practice, requires sufficient economic growth and very strict financial discipline;

29. Calls on the Member States to consider the issuance of common short-term debt in the form of eurobills, as referenced in the Van Rompuy report of 12 October 2012, to protect those Member States with fundamentally sustainable fiscal polices from illiquidity runs, as well as from the feedback loop between sovereign and banking crises and panic-induced negative externalities which create massive market distortions and generate implicit subsidies to Member States experiencing abnormally low interest rates on their sovereign bonds;

30. Urges the Member States to study the feasibility of moving towards a system of European Safe Bonds or to other proposals based on the concept of a basket of bonds;

31. Considers that eurobills, which could be time- and quantity-limited, would provide the time and stability for other measures such as the Stability and Growth Pact and the ‘Two- pack’ to prove themselves, and to put in place further longer term measures for future integration of the eurozone;

32. Calls on the Commission to engage in clarifying the legal restraints to the common issuance of bonds, especially Article 125 of the TFEU and its implication for three possible issuing modes: joint liability, several liability, and joint and several liability; urges the Commission to analyse the possible use of article 352/1 of the TFEU, or any other legal basis, for the implementation of a partial common debt issuance solution without a necessary Treaty change, including a surveillance and reporting framework, on the basis of Articles 121 and 136 of the TFEU, aiming at monitoring, on a quarterly basis, progress made by euro area Member States and by the euro area as a whole towards a reinforced and genuine Economic and Monetary Union, as well as aiming at coordinating the issuance of sovereign debt instruments not covered by any mutualisation framework;

33. Welcomes the principles of the decision taken by the Eurogroup Summit of 29 June 2012to ensure the stability of the euro “in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilise markets for Member States respecting their Country Specific Recommendations and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure”; acknowledges that the conditions will be set in a memorandum of understandings and that the ECB will “serve as an agent to EFSF/ESM in conducting market operations in an effective and efficient manner”;

34. Believes that, in parallel, there is an urgent need to recapitalise the European banking sector and to complete the single market for financial services in the EU; welcomes the proposals of the Commission to establish a single European supervisory mechanism for banking institutions as well as a single European recovery and resolution regime, ideally in parallel with the entry into force of the single supervisory mechanism; further requests that. in the future, the ESM may fund banks in difficulties directly after the single supervisory mechanism is made operational; stresses that the single supervisory mechanism needs to be accountable to Parliament and the Council for the actions and decisions taken in the field of European supervision and should report to the competent committee of Parliament;

35. Reaffirms the need to implement crisis management instruments, and acknowledges that inadequate regulation of the financial sector is a significant factor in the difficult budgetary situation of a number of Member States in the euro area;

36. Believes that the common debt issuance under separate liability, similar to the EFSF bond, risks not being sufficiently attractive for investors if some Member States participating in the scheme still lack sustainable finances;

37. Notes that it may become necessary to choose between three scenarios: first, a single interest rate for all participating Member states, resulting in a transfer of wealth between countries; second, a differentiated interest rate; and third, a single rate associated to a compensation scheme such as floated by the Commission, where Member States with lower ratings financially compensate those with better ratings;

38. Asks the Commission to elaborate further its option to establish a system of differentiation of the interest rates between Member States with divergent ratings, especially in order to clarify how and by whom these ratings are established once market mechanisms are neutralised by the introduction of common bonds;

39. Shares the view expressed by the Commission in its Green Paper that the stability of a eurobond system cannot rely solely on the shoulders of a small number of Member States with sustainable finances, and that such system would require a strengthened fiscal union, and stronger budgetary discipline and control, if it is to prevent moral hazard;

40. Believes that if a system of mutualisation of debt is deemed possible, and is well interwoven in a stability-oriented framework, a Treaty change should be envisaged in the roadmap to a genuine Economic and Monetary Union, which could result in the issuance of bonds under joint and several liability;

41. Believes that a system of partial substitution of national issuance (such as the blue/red bonds) might, on the one hand, reduce the cost of borrowing for those Member States that have sound and sustainable public finances, and, on the other hand, create an incentive for those with excessive debt to reduce it, as the risk associated with red bonds would be higher and interest rates would increase;

42. Calls on the Commission, in cooperation, where appropriate, with the ECB and the European Banking Authority (EBA), and in consultation with the Council and Parliament, to assess carefully all the technicalities linked to any scheme such as: guarantees, tranching and pooling structures, potential collaterals, the balance between rule-based and market based-fiscal discipline, additional safeguards (notably in terms of participation to any scheme), restructuring, issuance, relations with existing stability mechanisms, the investor base, the regulatory requirements (e.g. capital adequacy), phase-in coverage of debt and maturity; urges the Commission to reflect on a legitimate and appropriate form for governance and accountability;

43. Stresses that following the implementation of short-term measures to exit the crisis, and among the first steps of the binding roadmap, any follow-up must be undertaken on the basis of the ordinary legislative procedure, with full democratic accountability to be held on the level where the decision is taken; points out to the Commission that it may, when preparing its proposals, establish a temporary body composed of Members of the European Parliament and representatives of the Member States and of the ECB; recalls that it will make full use of its prerogatives and rights of initiative, including its right to initiate Treaty change; takes the view that this body should also look at the possibility of issuing genuine federal bonds in conjunction with an enhanced European budget;

44. Stresses that the Commission should study the feasibility of each and all of the options presented in the Annex to this resolution (both phase 1 and phase 2), as these options are not necessarily alternative but can be, under certain circumstances, cumulative;

45. Is aware that an ever increasing number of proposals for the mutualisation of debt are being made, especially in the academic field; notes that these proposals vary considerably;

46. Shares the Commission’s concerns with regard to accounting issues relating to the treatment of stability bonds under national law; urges the Commission to assess comprehensively the impact of different guarantee structures for stability bonds on national debt-to-GDP ratios;

47. Notes the moral hazard problem referred to by the Commission in the Green Paper, but, nonetheless, considers it necessary to perform a thorough analysis of the moral hazard problem in order to be able to draw the right conclusions and to find the appropriate solutions, if possible;

48. Believes that the problem of moral hazard could be overcome with a good definition of guarantees and incentive mechanisms for fiscal discipline;

49. Instructs its President to forward this resolution to the Council, the Commission and the European Central Bank.

• [1]  http://ec.europa.eu/economy_finance/focuson/crisis/documents/131201_en.pdf
• [2]  http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/132809.pdf
• [3]  http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131359.pdf
• [4]  OJ C 16 E, 22.1.2010, p. 8.
• [5]  Texts adopted, P7_TA(2011)0331.
• [6]  Texts adopted, P7_TA(2012)0046.

ANNEX

The Roadmap

Hereafter is a possible path made of a series of steps

Step 1 - Immediate measures to exit the crisis

1. Setting up of a temporary European redemption fund to reduce debt to sustainable levels at affordable interest rates

The Commission makes a proposal for the immediate setting up of a temporary European redemption fund along the following principles:

-  one-off transfer of debt amounts above the Maastricht reference value of 60 % of GDP to a common fund subject to joint and several liability through a roll-in phase of five years; such transfer should be phased and start with the transfer of only 10% of the debt above the Maastricht threshold of 60% of the GDP; subsequent transfers should be gradual;

-  limit participation to Member States without full adjustment programme; provide for a phasing in of Member States that have successfully completed an adjustment programme; The bridge for participation for Member States under an adjustment programme shall be properly assessed;

-  oblige Member States to autonomously redeem the transferred debt over a benchmark period of 25 years;

-– apply strict conditions which could take the form of (i) posting collateral; (ii) commit to fiscal consolidations plans and structural reforms;

-  implement the numerical fiscal rules of the reinforced EMU framework to limit the debts that remain exclusively with the participating Member States at a maximum of 60 % of GDP;

-  strengthen the co-ordination by implementing the new framework of economic governance together with a reinforced EU 2020 agenda and a binding structural reform agenda monitored by the Commission;

-   provide for transparent and predictable exit procedures for Member States. Staying should be incentivised and therefore exit should be costly; failure to respect commitments during the roll-in phase should immediately stop the roll-in phase and failure to respect commitments at any time should forfeit the collateral deposited with the Fund.

2. Introducing eurobills to protect Member States from illiquidity runs

The Commission makes a proposal for the immediate setting up of a system for the issuance of common short-term debt along the following principles:

-  establish an agency or use an already existing entity to issue eurobills with the participation of all eurozone Member States without full adjustment programmes; provide for a phasing in of Member States that have successfully completed their adjustment programmes;

-  those Member States that do not comply with the rules set-out in the Stability and Growth Pact might pay a penalty interest rate;

-  maximum maturity of eurobills (amounting to maximum 10% of GDP), which allows for continued monitoring and due to short term maturity frequent renewal of guarantees;

-  eurobills replace all short-term debt to be issued by Member States which consequently remain solely responsible for issuing their own debt for longer maturities which should be monitored and limited according to each country needs, fiscal situation and debt ratio;

-  adopt measures for the coordination of the issuance of sovereign debt instruments non covered by any mutualisation framework;

-  provide for participation by national parliaments as foreseen by constitutional rules of the Member State concerned;

The Commission should take into account the conclusions drawn by the final Van Rompuy report on a genuine Economic and Monetary Union.

Step 2 - Partial common issuance - Introducing Blue bonds: annual allocated debt ≤ 60 % of GDP to be issued without a Treaty change

The Commission shall study and report its conclusions to the European Parliament on the possibility of proposals for the setting up of a system for the allocation of debt below 60 % of GDP to be issued in common, which is safeguarded by national debt brakes or other adequate mechanisms to avoid moral hazard according to principles such as:

-  limit participation to Member States that comply with the Stability and Growth Pact and the communitarized fiscal compact in accordance with article 16 of the TSCG and are not under a full adjustment programme;

-  strictly limit the amount of debt to be issued under joint and several liabilities to a part of less than 60 % of GDP by prohibiting participating Member States from issuing senior debt outside the common issuance;

-  the ultimate decision on the allocation of Blue Bonds and their corresponding guarantees will have to be taken by the national parliaments of all the participating countries;

-  require participating Member States to post collateral;

-  design an allocation mechanism taking into account the respect of the fiscal discipline, the economic cycle, historic spreads and weighted by borrowing requirements.

Step 3 - Full common issuance of national debt involving a Treaty change

On the basis of the work of the committee, and after all eventual changes to the EU legal framework and, if necessary, a Treaty change and taking into account where necessary Member States’ constitutional changes, if appropriate, the Commission puts forward proposals for the setting up of a system for the common issuance of bonds according to the following principles:

-  limit participation to Member States which comply with the conditions as set out in phase 2;

-  establish a European debt agency for the issuance of bonds,

-  establish appropriate, democratically legitimate institutions which would among others be in charge of the surveillance and coordination of national fiscal policies and the competitiveness agenda, as well as the external representation of the euro area in international financial institutions;

Step 4 - Common issuance of a genuine European debt in conjunction with an enhanced European budget involving a Treaty change

The Commission, after having prepared all eventual changes to the EU legal framework and where appropriate euro area legal framework, puts forward proposals for possible issuance of bonds to finance EU investments for EU public goods (e.g. infrastructure, research and development, etc.), to facilitate adjustments to country-specific shocks by providing for some degree of absorption at the central level, to facilitate structural reforms that improve competitiveness and potential growth in relation to an integrated economic policy framework.

EXPLANATORY STATEMENT

1. The European Parliament introduced the idea of “Eurobonds” in the texts concerning the governance of the Euro zone (“6 pack”)[1] for multiple reasons:

- to ensure sustainable budgetary discipline, founded on liquid markets, which reflect the respective situations of the Member States;

- to provide liquid and safe assets for investors, drawing on the benefits of the Euro’s potential on the world markets;

- to protect the ECB by allowing it to focus on monetary policy.

Another issue is the danger which the current withdrawal of investors towards national debt represents for the Single Market.

2. The Green Paper[2] of the European Commission, whose publication was obtained by the EP during the “6 pack” negotiations, is a good starting point.

3. The aim of the current report is to go deeper still into this question, notably by studying the obstacles identified in the Resolution voted in the Parliamentary plenary by a large majority[3]: moral hazard, legal constraints, possible additional costs for AAA countries.

4. Given the link which exists between the sovereign debt crisis and the crisis in the banking sector, we mention, without being able to develop it here, the positive impact of a stabilisation of the sovereign debt markets on the banks. But Eurobonds are not a “miracle cure” to enable the sector to avoid undertaking specific measures, such as the creation of a resolution fund or a deposit guarantee fund.

5. The pooling of debt can not be considered lightly either. Linked to respecting strict conditions, it must be used for stability and not for ease, to limit moral hazard not to encourage it.

With the “6 pack”, the “fiscal compact”, and the “2 pack” in the process of being adopted[4], mutual budgetary surveillance and macro-economic convergence are in the process of being reinforced.

This is why a “roadmap” which links all progress towards Eurobonds with budgetary stabilisation and economic convergence is now able to be envisaged[5], the two processes must imperatively go hand in hand.

6. In order to provide citizens and the markets with a new horizon, it is important to look towards the middle-term, however, the worsening of the crisis calls for immediate action: the ECB has had to launch a programme to grant liquidity to banks (LTRO) and the spreads between Member States are increasing. In spite of engaging in reforms, some Member States are paying higher rates, at the risk of becoming insolvent, whereas others enjoy highly advantageous rates, in part thanks to their excellent performance, in part because of the troubles of their partners.

It is our responsibility to take measures to eliminate market distortions and to stabilise the Euro zone: if this situation continues, it will be the heart of the European project, the harmony between citizens, which would be affected. It would also impact on our credibility with third parties, as the G8 in Camp David has shown.

Part I. The Immediate Present

Two instruments can be used, in isolation, or by combining them, to limit the spreads between interest rates while still maintaining discipline.

I.1. The Sovereign Debt Redemption Fund (“Redemption Fund”)

Proposed by the German Council of Economic Experts, it entails transferring[6] Member States’ debt which exceeds 60% of national GDP into a fund, subject to joint liability, with a life span of approximately 25 years. The participating Member States commit themselves to respecting strict budgetary discipline and to undertaking reforms (competitiveness/growth). As well as ex ante guarantees (collaterals), certain tax revenues are assigned to the fund.

The finite life span reduces the moral hazard and the legal obstacle of joint debt[7]. Certainly, the additional cost of the debt which continues to be issued at the national level (60% of GDP) could be problematical for certain countries (Italy for example) whereas others (Spain for example) would draw a limited benefit. However, the “6 pack” already requires a dramatic debt reduction. Without a tool to contain interest rates, this commitment will be more difficult to respect.

That is why the ECON committee of the Parliament called for the creation of this fund, when the “2 pack” was voted on 14th June 2012.

I.2. Eurobills

Following a very different logic, the creation of eurobills[8] aims to eliminate the liquidity risk by the common financing of a part of the debt in the short term (maximum 10% of GDP/maturity of less than one year) of the participating Member States (or approximately 900 billion Euros). The Member States continue to decide the issuance timetable. Issuance is joint (by a debt agency) and exclusive; the guarantee is “joint and several”. It is possible to leave the system, according to the terms decided in advance.

Because the joint commitment by the Member States can be annulled at any time, there are a certain number of legal reservations which need to be overcome. By ensuring the liquidity of the debt market, these bills could also facilitate the phasing out of the ECB’s LTRO programme designed for banks. Combined with the capital requirement rules (implemented through “Basel III”), Eurobills could represent a particularly attractive investment.

Finally, these bills should indirectly generate lower long-term rates, as well as facilitate the transmission of the ECB’s monetary policy and risk management.

C. Lagarde and O. Blanchard (IMF) have taken position in the press in favour of these bills.

I.3. What about the existing tools (EFSF/ESM)?

With the EFSF, created in 2010, joint European securities have already been issued, in the spirit of the “3rd option” of the Green Paper (several liability). The discussion concerning “Eurobonds” needs a bit of perspective. It all depends on what we are talking about.

“Start small”, without joint guarantees, seems tempting but these securities still need to find takers[9], without excessive collaterals. This is why we are excluding this type of option. On the other hand, in order to avoid duplications, the EFSF, or to an even greater extent the ESM, could play a role as a “debt agency” for example.

In all cases, this Parliament would like to underline the need to improve democratic legitimacy: the EFSF, a company subject to Luxembourgish law, is only subjected to control by the national parliaments of the contributing Member States, the ESM is not controlled at the European level. Whatever choices will be undertaken by the governments in the future, we ask them to seriously consider the need for “accountability” (the pertinence of general orientations, management choices) and accounting oversight at EU level.

Part 2. In the short-term (within the existing Treaty)

The most advanced proposal is the “Blue Bond”[10] which the Commission took up in option 2 of the Green Paper: it consists of dividing each public national debt between a “blue” debt, below 60% of GDP (senior) and a “red” debt above 60% (junior); the blue debt is matched with a joint and several liability; the red debt remains national. A debt agency (or a consortium of national agencies) issues a mixed blue debt and returns the funds raised according to a pre-determined distribution key.

We keep the strong incentive to reduce the red debt, the creation of a market which is equivalent in size, in quality and in liquidity to the American public debt market as well as volumes being fixed by an independent European body, under the control of the national parliaments (which should enable us to work within the existing Treaties and to avoid modifying some national constitutions). There are of course still many open questions, notably the additional costs of the red debt, very discouraging for certain countries.

In order to avoid an excessive impact on AAA countries, it is perfectly conceivable to envisage modulated interest rates according to the country, notably depending on the respect of budgetary discipline and macro-economic efforts[11].

Part 3. In the medium-term (with a new Treaty)

Once discipline and macro-economic convergence are underway, joint and several Eurobonds will be able to be more easily conceived. They would require Treaty revision, and, in certain Member States, constitutional evolutions, as is recalled in Option 1 in the Green Paper.

Taking into account the challenges of this step, we propose to once again follow the method used for the single currency: the “Delors Committee”, while adding a role for the ECB and democratic legitimisation at the European level via the EP: representatives of Member States (independent of the governments), working with the Commission and the ECB would draw up proposals which would be publically debated in the EP and in the Council with the intention of creating bonds with all the required guarantees: strict budgetary conditionality and macro-economic convergence, the creation of a European Treasury, an increased democratic legitimacy, external representation of the Euro.

Part 4. In the long-term, federal debt for the Euro zone?

Even in the most integrated form as envisaged in part 3, Eurobonds would remain different from those issued by federal states because they would finance, in an aggregated way, the debt of the Member States and not that of the Euro zone.

In the United States, the bonds issued by the American Treasury co-exist with the bonds issued by the federal states, which are their sole responsibility (default is possible, there is no “bail out”).

Intellectually speaking, this “Delors Committee 2” should also study the creation, in time, with all the required guarantees, of a Euro zone debt, based on fiscal own resources, endowed with a budget which could play a counter-cyclical role and finance productive investments, notably European “public goods” (for example environment, security)

The option deserves to be analysed in order to preserve the collective stability of the Euro zone on the one hand, and the budgetary freedom of each Member State on the other. At this stage we are suffering from having the first while having already reduced the second, the required mutual surveillance is proving to be rather intrusive

The refusal of any federal solutions also has a cost, which, although rarely mentioned, is no less real.

• [1]  Draft report 11/01/2011, PR\853146EN ; Report, 02/05/2011, A7-0180/2011 ; First Reading, 28/09/2011, T7-0422/2011 – legislation entered into force end 2011
• [2]  Feasibility of introducing stability bonds, COM(2011) 0818 final, 23/11/2011
• [3]  Resolution of 15/02/ 12 on the feasibility of introducing stability bonds
• [4]  Draft regulations concerning common provisions for monitoring and assessing draft budgetary plans and ensuring the correction of excessive deficit in the euro area
• [5]  Eurobonds are not to be confused with “project bonds” (bonds issued to finance infrastructure projects, and guaranteed by the European Investment Bank).
• [6]  Annual report 2011/12 of the German Council of Economic Experts, Chapter III “Euro area in crisis” and Green Paper (Box 3).
• [7]  § 191 “The redemption pact would no doubt stand up to scrutiny by the German Supreme Court. According to its ruling of 7.9.11, German Parliament may not transfer its responsibility for the budget to other actors by indeterminate budget policy authorizations.
  What is decisive here is first the option the German legislative then has on a case by case basis to decide on support payments to its European partners that impact on expenditure. Second, the potential encumbrance of the German federal budget must be constrained in time, scale and in substance.”
• [8]  Eurobills, not Eurobonds, Ch. Hellwig and T. Philippon, voxeu.org
• [9]  The creation of a “basket bond” or “eurogovies” (a basket of bonds of the Member States of the Euro zone) is clever but does not respond to the need for a “European” asset.
• [10]  The Blue bond proposal, Bruegel Policy Brief, Delpla/von Weizsäcker, May 2010.
• [11]  An Eurobond without a free rider, Natixis, Cuillière/El Moutawakil, October 2011 or “Gains for All: A Proposal for a Common Euro Bond”, De Grauwe/Moesen, Intereconomics, May/June 2009.

OPINION of the Committee on the Internal Market and Consumer Protection (16.7.2012)

for the Committee on Economic and Monetary Affairs

on the feasibility of introducing Stability Bonds
(2012/2028(INI))

Rapporteur: António Fernando Correia de Campos

SUGGESTIONS

The Committee on the Internal Market and Consumer Protection calls on the Committee on Economic and Monetary Affairs, as the committee responsible, to incorporate the following suggestions in its motion for a resolution:

1.  Stresses that, as a necessary precondition for the common issuance of bonds, a sustainable fiscal framework needs to be in place; believes that, on the basis of both a stability and growth culture and a credible arrangement, stability bonds could foster stability in the euro area; states that the introduction of stability bonds could ease the pressure on sovereign debt, creating space for growth and employment, boosting the development of small and medium-sized enterprises and contributing to the completion of the internal market;

2.  Notes that common stability bonds represent a communitarisation of interest rate exposure and increase the typical problems of moral hazard for the insured party, which the indebted states need to tackle by adopting strict discipline in budgetary policy in order to achieve sound state finances and gain the confidence of financial markets; points out that the communitarisation of debt could tempt the Member States to reduce their efforts in terms of budgetary discipline, if strong conditionality and surveillance mechanisms are not put in place;

3.  Believes that the problem of moral hazard could be overcome with a good definition of guarantees and incentive mechanisms for fiscal discipline;

4.  Takes the view that stability bonds could support sustainable and responsible budgetary practices by including requirements for budgetary discipline and improved economic governance;

5.  Notes that the introduction of common stability bonds must necessarily go hand in hand with measures that involve a permanent reduction in government indebtedness, along with structural reforms in the Member States and sound budgetary policies;

6.  Sees common stability bonds as the final result of a process of convergence in relation to economic and fiscal policy, but believes that the issue of common bonds, once the necessary preconditions and criteria have been met in full, could help overcome the debt crisis in the longer term, and that other financial policy instruments are more suitable for supporting small and medium-sized enterprises and increasing their liquidity;

7.  Welcomes the fact that, as regards possible stability bond systems, a range of options is under analysis, but believes that it is necessary to assess all of the existing proposals, as listed in Annex 2 of the Green Paper, along with the recent proposal by the German Council of Economic Experts; considers it important to examine further how far the high degree of moral hazard attributed to option 1 could be counteracted by varying the interest rates to be charged to countries;

8.  Points out to the Commission that the rights of current bondholders would have to be taken into account if the new stability bonds were to be given senior status in relation to existing debt obligations;

9.  Calls on the Commission to clarify under what circumstances non-compliant Member States could be put under enhanced Union surveillance and scrutiny and what powers of intervention would be conferred upon the Union, to initiate the necessary political discussion and public consultation on the feasibility of stability bonds, while pointing out that the measures necessary to avoid and address moral hazard can have an influence on the fiscal sovereignty of the Member States, and to clarify the coordination and surveillance mechanisms required for swift enforcement of the economic and institutional conditions necessary for stability bonds;

10. Believes that consistent EU legislation is needed in order to introduce stability bonds;

11. Recalls that Article 125 of the Treaty on the Functioning of the European Union (TFEU) prohibits Member States from assuming the liabilities of another Member State;

12. Calls on the Commission to explain how the introduction of common stability bonds would work in view of the contractual disclaimer contained in Article 125 TFEU, and the extent to which changes to national law would be required in the Member States;

13. Asks the Commission to clarify the rules governing bonds and to determine which bodies would be competent in the event of a dispute in order to make the necessary provision in advance for the defence mechanisms to be laid down for investing citizens;

14. Recommends that the Commission define exit and entry criteria based on strong fiscal consolidation and budgetary discipline, while also taking into account the current crisis and the fiscal adjustments being pursued in a number of euro area countries.

RESULT OF FINAL VOTE IN COMMITTEE

Date adopted	10.7.2012
Result of final vote	+: –: 0:	23 7 2
Members present for the final vote	Pablo Arias Echeverría, Adam Bielan, Cristian Silviu Buşoi, Sergio Gaetano Cofferati, Birgit Collin-Langen, Lara Comi, Anna Maria Corazza Bildt, António Fernando Correia de Campos, Cornelis de Jong, Vicente Miguel Garcés Ramón, Evelyne Gebhardt, Louis Grech, Philippe Juvin, Sandra Kalniete, Edvard Kožušník, Toine Manders, Hans-Peter Mayer, Sirpa Pietikäinen, Phil Prendergast, Mitro Repo, Robert Rochefort, Heide Rühle, Andreas Schwab, Catherine Stihler, Emilie Turunen, Barbara Weiler
Substitute(s) present for the final vote	Raffaele Baldassarre, Jürgen Creutzmann, María Irigoyen Pérez, Emma McClarkin, Sabine Verheyen, Anja Weisgerber

OPINION of the Committee on Legal Affairs (4.6.2012)

for the Committee on Economic and Monetary Affairs

on the feasibility of introducing Stability Bonds
(2012/2028(INI))

Rapporteur: Raffaele Baldassarre

SUGGESTIONS

The Committee on Legal Affairs calls on the Committee on Economic and Monetary Affairs, as the committee responsible, to incorporate the following suggestions in its motion for a resolution:

1.  Welcomes the Commission’s Green Paper which represents a good starting point to assess possible solutions to foster financial stability, budgetary discipline and economic growth within the EU; recalls that stability bonds may represent a means for medium-term stability and that additional measures are necessary in order to combat the sovereign debt crisis in an effective fashion;

2.  Stresses that, among the suggested proposals, full substitution of stability bond issuance for national issuance would constitute the most suitable response to the sovereign debt crisis; considers, however, that the relevant prerequisites in terms of economic, financial and political integration still need to be fulfilled; considers, therefore, that it seems appropriate to proceed gradually, particularly with regard to the legal implementation of stability bonds; invites the Commission to swiftly clarify all legal concerns with regard to the legal framework for the implementation of stability bonds, and accordingly to put forward proposals, involving Parliament and the Council as necessary;

3.  Considers that consistency with EU law is a precondition for the introduction of stability bonds; accordingly, emphasises the need for a solid legal framework in order to provide financial market stability in a way which is compatible with the Treaty while reducing the risks of moral hazard, while also enhancing fiscal discipline and creating the scope for further measures that will contribute to market stability and sovereign debt sustainability;

4.  Is aware that the introduction of stability bonds can improve the implementation of budgetary policies at Member State level; points out, on the other hand, that further measures in terms of economic governance might necessitate Treaty changes; calls on the Commission to assess further measures with a view to combating the sovereign debt crisis quickly;

5.  Shares the Commission’s concerns with regard to accounting issues relating to the treatment of stability bonds under national law; urges the Commission comprehensively to assess the impact of different guarantee structures for stability bonds on national debt-to-GDP ratios;

6.  Notes the moral hazard problem referred to by the Commission in the Green Paper, but nonetheless considers it necessary to perform a thorough analysis of the moral hazard problem in order to be able to draw the right conclusions and to find the appropriate solutions if possible;

7.  Invites the Commission further to explore the possible combination of approaches through gradual implementation; to this end, considers that an introduction of stability bonds based on a partial approach could ease the market acceptance while overcoming legal constraints.

RESULT OF FINAL VOTE IN COMMITTEE

Date adopted	31.5.2012
Result of final vote	+: –: 0:	20 1 2
Members present for the final vote	Raffaele Baldassarre, Luigi Berlinguer, Sebastian Valentin Bodu, Françoise Castex, Christian Engström, Marielle Gallo, Giuseppe Gargani, Lidia Joanna Geringer de Oedenberg, Sajjad Karim, Klaus-Heiner Lehne, Antonio Masip Hidalgo, Evelyn Regner, Francesco Enrico Speroni, Rebecca Taylor, Alexandra Thein, Cecilia Wikström, Zbigniew Ziobro, Tadeusz Zwiefka
Substitute(s) present for the final vote	Sergio Gaetano Cofferati, Luis de Grandes Pascual, Eva Lichtenberger, Axel Voss
Substitute(s) under Rule 187(2) present for the final vote	Elisabeth Morin-Chartier

RESULT OF FINAL VOTE IN COMMITTEE

Date adopted	29.11.2012
Result of final vote	+: –: 0:	19 12 7
Members present for the final vote	Jean-Paul Besset, Sharon Bowles, Udo Bullmann, Leonardo Domenici, Diogo Feio, Markus Ferber, Elisa Ferreira, Jean-Paul Gauzès, Sven Giegold, Sylvie Goulard, Liem Hoang Ngoc, Othmar Karas, Jürgen Klute, Rodi Kratsa-Tsagaropoulou, Philippe Lamberts, Hans-Peter Martin, Arlene McCarthy, Ivari Padar, Anni Podimata, Antolín Sánchez Presedo, Peter Simon, Theodor Dumitru Stolojan, Kay Swinburne, Sampo Terho, Marianne Thyssen, Corien Wortmann-Kool, Pablo Zalba Bidegain
Substitute(s) present for the final vote	Philippe De Backer, Herbert Dorfmann, Ashley Fox, Sophia in ‘t Veld, Marisa Matias, Nils Torvalds
Substitute(s) under Rule 187(2) present for the final vote	Evelyne Gebhardt, Monika Hohlmeier, Christa Klaß, Christa Klaß, Jan Kozłowski, Edvard Kožušník, Jo Leinen, Peter Liese