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27 January 2011

Graham Bishop: Three proposals to ensure fiscal sustainability in the eurozone

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The EFSF should be reformed to encourage eurozone members to borrow via it - as a major carrot to good fiscal behaviour as the EFSF should be the cheapest form of borrowing for many States. But there is a big stick: removal of "special access to financial institutions" for ineligible States.

Summary: Three Proposals for Action

I. Build on the emerging political union between eurozone Member States* and modify the EFSF (and its successor) to make it the preferred borrowing route for most Members. That would be a huge carrot, but there must also be a genuine stick that would be virtually automatic. The latter can be achieved by the following two steps:

II. Insert into the Definitions Article of the relevant Commission economic governance proposals: “Special access to financial institutions” means special treatment for the borrowings of a Member State held by any financial institution subject to EU regulations. This treatment is in respect of capital requirements, eligibility as liquid assets and absence of prohibition on concentration of asset holdings. Such special access shall only be available to Member States that are permitted to borrow from the European Financial Stability Facility (and its successor), or would be so permitted if they applied.

III. Add an Article to the sanctions sections of the relevant enforcement Regulations: Any Eurozone Member State subject to sanctions is ineligible to borrow from the European Financial Stability Facility (and its successor) and therefore loses its special access to financial institutions.

* These proposals build on Scenario III in my recent book, “The EU Fiscal Crisis: Forcing Eurozone Political Union in 2011?” (details). Under this scenario, eurozone would emerge in 2011 from the financial crisis as a political federation – loose in some respects, but with tightly centralised economic governance at its heart.


© Graham Bishop

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