Government Funding Privileges in European Financial Law – Making Public Debt Everybody's Favourite?

CentER Discussion Paper Series No. 2016-045

45 Pages Posted: 5 Dec 2016

See all articles by Ad van Riet

Ad van Riet

United Nations University - Institute on Comparative Regional Integration Studies (UNU-CRIS)

Date Written: November 30, 2016

Abstract

Since the global financial crisis of 2008 European authorities have set out to strengthen financial governance in order to create a more stable and resilient financial system. As discussed in this paper, the new and updated EU legislation addressed at a wide array of financial markets and institutions also significantly broadened the scope of the existing preferential regulatory treatment of sovereign bonds and introduced new funding privileges for governments. The many regulatory incentives for investors to buy and hold (domestic) government debt facilitate public debt management, at the cost of crowding out private sector funding and raising financial stability concerns every time the government faces distress. Moreover, a privileged access to capital markets reduces market discipline and may lead to moral hazard on the part of sovereigns. The growing scope of these government funding privileges in EU financial law may be interpreted in three (complementary) ways: as a revival of financial repression in a modern prudential guise to reduce the burden of high public debt, as a return to the traditional close relationship between the government and the financial sector so as to align mutual interests in fiscal and financial stability, or as a way to increase explicit and implicit taxes on finance and recoup public revenues lost during the financial crisis. The preferential treatment of sovereign exposures and governments’ market access is found in a growing body of EU financial law. Regulatory efforts to reduce it would have to be coordinated at the international level, take account of the financial structure and allow for a (long) period of transition to avoid market disruption.

Keywords: European financial reform, financial repression, regulatory capture, financial stability

JEL Classification: E44, F3, G18, G28, H63

Suggested Citation

van Riet, Ad, Government Funding Privileges in European Financial Law – Making Public Debt Everybody's Favourite? (November 30, 2016). CentER Discussion Paper Series No. 2016-045, Available at SSRN: https://ssrn.com/abstract=2878841 or http://dx.doi.org/10.2139/ssrn.2878841

Ad Van Riet (Contact Author)

United Nations University - Institute on Comparative Regional Integration Studies (UNU-CRIS) ( email )

Brugge
Belgium

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
36
Abstract Views
449
PlumX Metrics