A Realist’s Guide to Euro-Zone Integration

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The European Commission is once again busy drafting plans for the future of the euro zone. This week’s “Reflection Paper on the deepening of the economic and monetary union” follows a long string of reports, which have often promised much more than politicians and bureaucrats were then able to deliver.

Still, there is hope in Brussels that this time things may be different. European Commission Vice President Valdis Dombrovskis is relatively optimistic that member states can be persuaded to integrate further. “We see there is determination from EU-27 to continue to move forward, and we believe this momentum is there also to complete the monetary union,” he tells me in his office in Brussels. “Certainly, with a clearly pro-European president in France, we see there can be more momentum behind this discussion on the future of EMU.”

The politics has definitely shifted in the direction of more EU integration. Britain’s departure has triggered a rethink over the future of the EU. The election of Emmanuel Macron, a fierce europhile, as French president, has shown voters are not necessarily afraid of the promise of greater economic integration. The real question is what shape this new economic governance should take.

The most eye-catching proposal to come from the commission’s report is the creation of so-called “Sovereign Bond-Backed Securities” (SBBS), financial instruments which would bundle together government debt from across the euro area. The idea is to create a “safe asset” for European banks to invest in, like U.S. Treasuries, allowing them to diversify away from their own government bonds. In doing so, the commission hopes to break the “diabolic loop,” as it is often referred to, between banks and sovereigns — the perpetual purchasing of national government debt by their banks – which can spread a fiscal crisis to the financial sector, as it did in Greece…

Read more : Bloomberg, 02.06.2017