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Celebrate European safe assets joining the trillion euro club

by SuperiorInvest

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The author is financial director of the European Stability Mechanism.

An important milestone has been reached this month. There are more than €1 trillion in European safe assets on the market issued by the European Commission, the European Investment Bank and the European Stability Mechanism plus the European Financial Stability Facility. The figure has almost doubled compared to 2014, after the eurozone crisis.

Ahead of the European Parliament elections in June, many ambitious political ideas are being put forward. The heads of state of France and Estonia, for example, have called for the issuance of joint bonds to finance defense spending. The former president of the European Central Bank, Mario Draghi, has spoken of enormous gaps in competitiveness and public goods.

Financing such ambitions at the national level may not be feasible, as countries need to consolidate their public finances to make room for investment and protect against future crises. Financing public goods through European institutions could be easier, as recent history has shown. The EU is still disbursing €800 billion from the Next Generation EU-Covid package. The EIB issues 60 billion euros per year. The ESM currently has a lending capacity of 422 billion euros. These are big numbers.

A key advantage is that these triple-A rated bonds are backed by European sovereigns. With higher interest rates, we have seen international investors regain interest in the euro. Europe has built a solid financial architecture, which has helped it remain unaffected by the banking turmoil that occurred in the United States and Switzerland last year.

Economically, Europe is also doing better than many expected, although growth is forecast to remain quite weak. Finally, due to quantitative tightening, there are simply more European assets in the market. We have seen the most active primary market in 15 years in early 2024.

Investors are more optimistic about Europe than in the past. By 2024, a total of 40 percent of ESM and EFSF bonds will have been assumed by central banks, governments and sovereign wealth funds. 26 percent of this issuance was assumed by Asian investors. Overall, these are the highest figures since 2011, when the EFSF first started issuing bonds.

As the June elections approach, the question of how to finance European public goods becomes inevitable. In the past we have seen that a joint response has produced positive results. The common monetary and fiscal response to the eurozone crisis calmed the markets.

The joint response to the Covid crisis, the initial response of the ESM, the EU and the EIB worth €540 billion and Next Generation EU, combined with the ECB's pandemic emergency purchasing programme, helped contain spreads the bonds.

Greece and Cyprus, supported by the ESM and other European packages during the eurozone crisis, have regained investment grade status from the big rating companies and are now attractive again to financial markets. Baltic States spreads have also narrowed, despite the initial widening that occurred at the start of the war in Ukraine in 2022.

The trillion euro club also contributes significantly to the capital markets union. In 2021, the ESM introduced the five Ss, which changed the rules of the game for European capital markets: supervision, securitization, SME financing, sustainable finance and, most importantly in this case, safe assets.

This tells us that when Europe acts together, it is capable of convincing the world and the markets. Ahead of those important elections in June, it is good news for European policymakers that support for the euro is at an all-time high and that the necessary financial institutions are in place. A joint response to major geopolitical challenges boosts Europe's role in the world.

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