European Safe Assets: Past, Present, and Future

Abstract

During and in the aftermath of the euro area sovereign debt crisis, many considered a common safe asset as a necessary condition for a stable European monetary union (EMU). However, intellectual efforts had far outstripped tangible policy action, until the pandemic turned the political debate upside down. Even though euro area governments agreed on the creation of the European Stability Mechanism (ESM), a lender-of-last resort to members of the currency union, a mechanism for (substantial) joint borrowing has been absent to date, as has been common deposit insurance, common unemployment insurance or other automatic stabilizers. In short, EMU suffers from the congenital defect of a lack of significant fiscal capacity. Against this backdrop, this Chapter investigates the past, present, and future of safe assets in the EU. It is structured as follows. Section 2 reviews past borrowing programs and the safe assets these have produced. We show that the NGEU’s financing mechanism is not new; rather it is a scaled-up version of past EU borrowing programs. The Section also discusses the euro area’s two borrowing mechanism via separate supranational issuer: the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM). Section 3 zooms in on the legal aspects of EU safe assets, highlighting both commonalities and differences between the various debt issuance programs and analyzing the pertinent legal features of the debt instruments the EU has relied on. Section 4 concludes.