Unlock the editor’s summary for free
Roula Khalaf, editor of the FT, selects her favorite stories in this weekly newsletter.
The writer is an Ing chief economist
The dollar is losing its state as a paradise for all use, highlighted by Moody’s recent reduction of its last triple A credit rating of one of the three major agencies. The EU now has a unique opportunity to capitalize on investors’ doubts and promote the euro as a reserve currency, a measure that would produce important economic benefits. It is time to break the taboo with the issuance of common debt by the EU supported by the Member States.
The decrease in the dollar is partly due to the commercial and budgetary policies of President Donald Trump, but there is also a structural change: foreign holdings of the US debt fell from 50 percent of the pending debt battery in 2014 to only one third by 2024. Meanwhile, the foreign interest in European bonds, especially the German bunizos, throughout the 2023 and 2024 foreign holdings in approximately ‘° of the German 60 years, the levels of the 8. currently outstanding bunds.
The EU must accelerate this trend for two reasons. First, a greater demand for euros means cheaper indebted costs for governments, corporations and owners of the block block. The bank for international settlements found that $ 100 billion in foreign purchases of US Treasury Bonds. Uu. Interest rates dropped into 0.20 percentage points using conservative estimates, illustrating the substantial beneficial impact of having increased foreign holdings.
Secondly, positioning the euro as an alternative refuge brings stability during recessions. In times of economic stress, a flight to euro assets would reduce financial costs for European governments, giving them more tax ammunition to stabilize their economies. In times like that, European banks would also receive a boost in the value of their government debt assets, breaking the “fatality loop” on the bank that scared the markets during the Eurozone crisis of the early 2010s, when the liquidations in the national debt weakened the bank values ​​and vice versa. More resistance in a crisis would allow lenders to continue supporting the real economy, instead of breaking it in the worst possible moments.
To capitalize this singular historical moment, Europe needs to act quickly. Playing a stronger role as a refuge requires greater availability of safe assets. This includes the bonds of the highly qualified national government as well as the bonds of the eurozone backed by the Member States and issued at a predictable rate.
For some governments, particularly those with lower debt relations of GDP, the eurozone bonds are plagued by moral danger: they fear that supporting the common debt would simply encourage the most wasteful companions to load and maintain the expense. That is a fair criticism, but the opposition bonds of the Eurozone would directly mean losing a much greater opportunity that would benefit frugal countries.
One way to mitigate improvisation is to make the bonds of the conditional eurozone. For example, they could replace national debt, instead of adding to general actions. As Hélène Rey, economics professor at the London Business School, has argued: there is no need to execute very high government deficits to be the world reserve currency. It is a sufficiently large action of available debt. As happens, here in Europe there is a generous stock in our hands that common bonds could replace. A stronger restriction by breaking the EU rule that government deficits should not exceed the 3 percent deficit to GDP, since part of the plan would reduce the risks of moral danger.
Even with conditionalities, there may be concerns among interested parties in Finland, the Netherlands and Germany that issue the debt together with, for example, Italy and Greece, would increase their indebtedness costs of the individual government. However, this perspective is excessively pessimistic. European institutions already issue the debt with a triple A rating, which is higher than the medium -sized double grade rating A.
In addition, if European governments jointly finance a small portion of their debt, for example, the first 10 percent, this implies the risk of grouping. Consequently, this would reduce the general risk associated with the European sovereign debt and potentially lead to improved qualifications for all national governments. In addition, the increase in liquidity and regular emission of the eurozone bonds can result in their inclusion in sovereign rates and help grow a futures market.
This returns to the general impact on financing costs. For the context, the EU currently pays a premium from 0.15 to 0.20 percentage points to finance for seven to 10 years compared to the Dutch government. The greatest popularity at home and abroad could easily generate future common financing costs below the current price paid by a relatively frugal country such as the Netherlands. It is not necessary to say that the countries in the south of the EU can benefit more, an impact that would also benefit the rest as the domestic market would grow faster.
The economic case is clear to the EU that begins to design acceptable frames to issue eurozone bonds if you want to capitalize on the weakness of the United States.
