Economists call for overhaul of euro zone, creation of joint “safe assets”

By Michael Nienaber

BERLIN (Reuters) – Leading economists from France and Germany on Wednesday weighed into the politically heated debate about making the euro zone more resilient against future crises by calling for new fiscal rules and the creation of a virtual euro area “safe asset”.

The proposals are meant to bridge German demands for more fiscal discipline and France’s insistence on more risk-sharing as Paris and Berlin try to inject new momentum into their stalled European Union reform efforts.

The question of how to improve governance of the 19-member single currency bloc will also be discussed when Germany’s acting Finance Minister Peter Altmaier welcomes the Eurogroup’s new president, Mario Centeno, for talks in Berlin on Wednesday.

Altmaier, one of Chancellor Angela Merkel’s closest allies, will then travel to Paris for talks with his French counterpart Bruno Le Maire on Thursday.

In their 33-page reform paper, the 14 economists from France and Germany call for an overhaul of euro area fiscal rules, the creation of an independent fiscal watchdog and a joint euro zone fund as well as a new synthetic euro area “safe asset” that offers investors an alternative to sovereign bonds.

It would effectively be a derivative of weighted sovereigns.

“Implementing these reforms would be a game-changer for the euro zone, significantly improving its financial stability, political cohesion and potential for delivering prosperity to its citizens, all while addressing the priorities and concerns of the participating countries,” the economists said.

“Our leaders should not settle for less,” said the experts, including Ifo institute president Clemens Fuest and Jean Pisani-Ferry, a former adviser to French President Emmanuel Macron.

The economists want to replace current fiscal rules, focused on the structural deficit and a three percent limit, by an expenditure rule and a long-term debt-reduction target.

“A rule of this type is both less error-prone than the present rules and more effective in stabilizing economic cycles, since cyclical changes in revenue do not need to be offset by changes in expenditure,” the group said.

They recommended that compliance with the new fiscal rules should be monitored by national watchdogs which would be supervised by an independent euro zone institution.

The idea of a synthetic euro zone bond is likely to draw a rebuff from Chancellor Angela Merkel’s conservatives who are skeptical about creating new tools for more risk-sharing.

But the economists insisted that introducing such assets in parallel with a regulation on limiting sovereign concentration risk would help “smooth the transition away from excessive concentration on home-country government bonds”.

Merkel’s conservatives and the center-left Social Democrats last week agreed on the blueprint for a governing coalition. The draft raises the prospect of an “investment budget” for the single currency bloc, a nod to Macron’s call for a budget to help the euro zone cope with external economic shocks.

It also calls for the ESM bailout mechanism to be turned into a full-blown European Monetary Fund under parliamentary control and anchored in EU law.

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