A sufficient supply of safe assets denominated in euros is critical if the European Union is to achieve a full banking and capital markets union.
A sufficient supply of safe assets denominated in euros is critical
if the European Union is to achieve full banking and capital markets
union while fostering the euro’s international role. The European debate
on developing the supply of safe assets has so far focused on the
possible creation of a common safe asset. This has tended to underplay
the potential contribution of sovereign assets. Expanding the supply of
national safe assets, notably through the gradual implementation of
fiscal and growth-oriented structural policies in euro-area countries,
leading to upgrading of their sovereign ratings, provides a promising,
and perhaps more feasible, option. An upgrade to triple A of those
euro-area countries that are currently rated double A could produce
substantially more safe assets than most common safe asset proposals,
including those based on the development of ‘synthetic’ safe assets.
There has been a remarkable increase in the share of supranational
assets in the stock of euro-based safe assets since 2008, reflecting
downgrades in sovereign ratings and the EU’s financial responses to the
euro-area crisis and the pandemic. However, safe assets in euro remain
dominated by those issued by euro-area governments. Although common safe
assets have certain advantages over national safe assets, reflecting
their built-in risk diversification properties, there is currently not
much political appetite for such proposals. Meanwhile, sovereign safe
assets already offer many of the advantages of common safe assets.
Sound fiscal policies and growth-stimulating reforms, which are in
any case desirable, should be implemented to improve the credit ratings
of euro-area sovereigns. This might not be politically feasible in the
short-term, given the difficult economic environment currently faced by
the EU, but it should be a key component of the EU’s medium-term safe
asset strategy. Should the political consensus be found to create a
common safe asset, such an asset could be incorporated into the euro
area’s existing safe asset system, reinforcing its positive effects.
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