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European sovereign bond-backed securities: A dangerous idea

The securitization of European government bonds is likely to increase hierarchies in the Eurozone. Eurobonds represent the most viable path to fiscal solidarity and political union.

Recently, European policymakers and representatives of financial institutions met in Paris at a workshop organised by the European Systemic Risk Board, the body which is responsible for the macroprudential oversight of the EU financial system. They discussed the creation of sovereign bond-backed securities as a solution to the scarcity of safe assets in Europe.

We argue that this proposal to securitize government bonds fails to tackle what we see as the fundamental problem of the Eurozone: the absence of a political union with a common fiscal policy and government bond market. In times of political-economic distress across the European continent, the securitization of government bonds may even exacerbate conflicts between highly-rated and low-rated sovereign states. As an alternative, and set against the perils of market-based financial innovation, we believe that policymakers should be starting a necessary and serious debate about how to implement Eurobonds. This simple but effective instrument would be an expression of…

To continue reading the post, please visit http://speri.dept.shef.ac.uk/2017/01/10/european-sovereign-bond-backed-securities-a-dangerous-idea/ 

 

This Blog post was written for SPERI by Dr Andrea Lagna, Lecturer in International Management and Innovation at the School of Business and Economics, Loughborough University, and Benjamin Wilhelm, Research Associate at the University of Giessen.