Bond Next Generation Eu: purposes, scenarios and unknowns
A European debt requires a European budget financed with own resources and a decision-making mechanism not dependent on the unanimous agreement of the EU countries. The analysis of the economists Baglioni and Bordignon taken from Lavoce.info
Great success for the first issue of securities to finance the Next Generation EU. The hope is that this is a first step towards the creation of a European public debt security. But the road is still long and there are pitfalls.
Good news from the first issue
Almost a year after the agreement reached in the European Council, the Next Generation EU is finally on the runway. On 15 June the Commission approved the first 5 national resilience and recovery plans (for Italy the approval is scheduled for 23 June, a week before the deadline) and at the same time it placed on the market the first tranche of the European debt which it will be used to finance the plan. This is a 10-year bond for 20 billion euros, which will be followed by other issues in the coming months for a total of 100 billion in 2021, of which 80 billion long-term, with maturities ranging from 3 to 30 years, and 20 billion with shorter maturities. . The resources raised in 2021 will be used to finance the anticipated advance to the countries of 13 per cent of the total funds of the Recovery and resilience facility (approximately 25 billion for Italy).
In the next five years, until 2026, the Commission will then have to issue bonds for the residual value of the plan, about another 630 billion if all countries fully exploit the possibilities of borrowing from the EU. In fact, it should be remembered that the NGEU has a total size of 750 billion, 390 of which will be attributed to the countries in the form of transfers and the remainder in the form of loans. All are financed with debt issues by the European Union, but the first part is a debt from the EU budget (and will therefore be gradually repaid over the next 37 years by member countries based on their share of the European budget financing. , through or contributions or the transfer of fiscal resources), while the latter are debt of the countries themselves to the European Union and must be returned to the latter. To the European debt issued to finance the NGEU are then added 100 billion issued for the Sure fund, which has already been almost completely optioned by European countries. Overall, the EU will therefore be the main issuer of euro securities over the next five years.
The other good news is that demand was much higher than supply, so that the 10-year yield, at 0.09 per cent, was somewhere between the German Bund yield (32 basis points higher). ) and those of the other national titles. This is a sign that the markets consider European debt only marginally riskier than the German one, although implicitly guaranteed by many other countries with lower creditworthiness. At these rates it is cheaper for some countries (including ours) to borrow money from the European Union rather than on the market; and this convenience is likely to increase further with longer-term issues, where high-debt countries find it harder to borrow. From the information available, this debt – as well as the Sure debt – should not be privileged over the national debt, although of course the European Union has numerous instruments to guarantee payment by member countries.
Future prospects
Aside from relative benefits to different groups of countries, European debt can also potentially offer numerous other benefits to the functioning of the monetary union. As is known, this lacks a European-level safe asset. The introduction of a security of this type would respond to the need to diversify the risk present in the portfolios of government bonds of banks. They are currently affected by a strong home bias: banks in all countries generally favor domestic government bonds over those issued by other countries. A European safe asset, on the other hand, would be a security with a diversified risk being guaranteed by the various EU countries. The availability of this title could solve a very delicate regulatory problem: that of capital requirements for government bonds, which some countries (including Germany) would like to introduce but others (including ours) see as smoke and mirrors. for the impact they would have on banks' balance sheets and on the public debt market. One of the purposes of these requirements is to correct the home bias and the associated risk concentration. This goal could be achieved if banks converted part of their securities portfolio from domestic government bonds to the European safe asset, which would remain free from capital requirements.
The European safe asset could also be purchased by the European Central Bank, thus correcting an anomaly in the European institutional set-up, which contributed to delaying the introduction of Quantitative Easing in the euro area compared to what happened in other countries: the absence of a federal debt. This has placed the ECB in the difficult position of having to choose how to distribute its purchases among the national bonds issued by the different governments of the euro zone. It has also generated the suspicion that Qe could translate into an advantage for some countries with high debt, so much so as to induce several German citizens to appeal against the decisions of the ECB: appeals from which the sadly known sentences of the Constitutional Court originated. German. The presence of a federal debt would spare us these problems.
A European safe asset would also strengthen the international role of the European currency, allowing acceding countries to exploit the privileges currently enjoyed by the dollar as a reserve currency and means of international payment. Improperly, this role of safe asset has so far been played by the German Bund, with the problem that the issue of this bond depends exclusively on the decisions of a single national sovereignty, however important. A sovereignty, moreover, obsessed with the sacredness of the balanced budget which has led in recent years to a progressive reduction of German bonds on the market, with a resulting reduction in yields. European debt, as a close substitute for the German Bund markets, can help to partially reduce these distortions.
We need a common budget
But it is also advisable not to have excessive illusions. First of all, the size of the European debt (the 800 billion mentioned above) is in any case limited compared to what would be necessary; this is only about 5 per cent of the European GDP, while according to estimates a quota of around 35-40 per cent would be needed for it to fully play the role of safe asset. Secondly, at least for the moment, these European debt issues are planned as a one-off; neither the Ngeu nor the Sure are designed as permanent programs, and all the debt now created should be repaid within 37 years.
Of course, it is possible that this does not happen and it is decided instead to renew it when it expires and use it to support European policies; but this requires, in addition to the proven proof that the NGEU has worked, that is, that it has achieved its objectives in the most benefited countries (starting with ours), a federal evolution of the EU that is not at all obvious. The cumbersome way in which the NGEU has been financed (with all the countries that have had to unanimously decide to commit to guaranteeing more resources for the next European budget than it will spend in the next 7 years, so as to create a headroom that the EU was able to use it as a guarantee to investors to get into debt) and the delays in moving from the political decision to the implementation of the NGEU show the difficulties for the Union to pursue this path in the present institutional context. At the end of the fair, a European debt requires a European budget financed with its own resources and a decision-making mechanism not dependent on the unanimous agreement of the member countries.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/bond-next-generation-eu-fini-scenari-e-incognite/ on Sun, 20 Jun 2021 06:40:20 +0000.