Making the Eurozone Works: A Risk-Sharing Reform of the European Stability Mechanism

48 Pages Posted: 25 Jul 2018  

Giovanni Dosi

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Marcello Minenna

Bocconi University; CONSOB (Commissione Nazionale per le Società e la Borsa)

Andrea Roventini

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM); Observatoire Français des Conjonctures Economiques (OFCE)

Roberto Violi

Bank of Italy

Date Written: July 4, 2018

Abstract

This work presents an original proposal for the reform of the Eurozone architecture according to an approach based on risk sharing (aiming to reach in the long-term the mutualization of public debt). The proposal envisages a new role for the European Stability Mechanism (ESM) which should gradually become the guarantor of the public debts of the EMU. In this way, the new ESM would support the full transition from national debts to a single Eurozone public debt (e.g. Eurobonds) with a single yield curve for all countries. Our proposal would benefit both core and peripheral EMU countries. Indeed, the riskiest countries, which would gain from the ESM conditional debt guarantee, should give up the possibility of redenominating their national debt and would pay to the ESM the corresponding market price of the guarantee. This would strengthen the capital endowment of the ESM and also allow it to use its leverage capability to support the realignment of the economic cycles of the different countries through profitable public investment plans concentrated in the weakest regions of the EMU. Such plans would be coordinated and implemented by the European Union. After a transition period, our Insurance Fund proposal would contribute to a much more resilient monetary union, with a European fiscal policy and debt. Admittedly this proposal presupposes a political consensus at the EU level to reinterpret to the no bailout rule enshrined in the treaties so that risk sharing institutions implemented with fairly priced insurance scheme can be allowed. New risk sharing institutions will foster a common vision of belonging to the same federal, political union in the making, the only one compatible with the abdication of fiscal sovereignty by national governments.

Keywords: Sovereign Debt, Risk Mutualization, Insurance Fund, ESM, ECB, OMT, CDS Spread, Investment Multiplier, Market Discipline

JEL Classification: E02, G01, H12, H63

Suggested Citation

Dosi, Giovanni and Minenna, Marcello and Roventini, Andrea and Violi, Roberto, Making the Eurozone Works: A Risk-Sharing Reform of the European Stability Mechanism (July 4, 2018). Available at SSRN: https://ssrn.com/abstract=3208267 or http://dx.doi.org/10.2139/ssrn.3208267

Giovanni Dosi

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta, 33
Pisa, I-56127
Italy

HOME PAGE: www.lem.sssup.it

Marcello Minenna (Contact Author)

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

HOME PAGE: http://didattica.unibocconi.it/docenti/cv.php?rif=92888

CONSOB (Commissione Nazionale per le Società e la Borsa) ( email )

Roma 00198
Italy

Andrea Roventini

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta', 33-I-56127
Pisa
Italy

Observatoire Français des Conjonctures Economiques (OFCE) ( email )

69 Quai d'Orsay
Paris 75004
France

Roberto Violi

Bank of Italy ( email )

91 via Nazionale
Rome, rome 00184
Italy
+390647924108 (Phone)

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