It’s Wednesday and I have several items to discuss or provide information about today. Today, I discuss the future of the EU-bonds that were issued as part of two main emergency interventions in 2020 as policy makers feared the worse from the pandemic. The question is whether these assets can ever become ‘safe’ in the same way that Japanese government bonds or US treasury bonds are clearly ‘safe’. The answer is that they cannot and the reason goes to the heart of the problem besetting Europe – the fundamental monetary architecture is flawed in the most elemental way. I also provide some updates for MMTed and a great new book. And, of course, this week, I have to remember Jeff Beck in the music segment.
The EU bond story
Regular readers will know that when the Economic and Monetary Union (EMU) a.k.a. the Eurozone, was established, it was inconceivable that a European-wide bond would be established by the European Commission.
Germany and its frugal northern neighbours were always against the possibility of such a bond being issued for which they would be jointly liable.
In part, that is why the EMU continues to survive only because the European Central Bank violates the no-bail out clauses and funds government deficits through its secondary market bond-buying programs, which have been massive and continue.
Without the asset-buying programs, individual Member States would face dramatic increases in their bond yields and ultimately would be unable to fund their deficit positions.
We saw how close Greece and Italy came to bankruptcy during the GFC, which is why the ECB started buying up government bonds.
So at the fundamental architecture level, the EMU is dysfunctional and unable to deliver sustainable prosperity.
The Germans and its supporter Member States refused to allow a European-wide bond to be issued to back fund transfers for beleagured Member States, particularly the troubled Southern states because they claimed that, ultimately, they would have to pay the debt back yet get no benefit.
It would also encourage risky wasteful spending by the weaker states – the moral hazard argument.
Nothing much has changed on that front.
Except it has a little.
In 2020, the European Commission introduced two emergency support programs:
1. SURE – In April 2020, the Commission announced the introduction of the – The temporary Support to mitigate Unemployment Risks in an Emergency (SURE) – which was designed to inject funds into Member State government coffers to deal with the pandemic.
The funds were loans rather than grants.
Germany and Co would not allow permanent transfers to be made.
Each Member State was required to provide guarantees for the SURE scheme in proportion to its liability share in the overall EU budget.
The overall fund so far disbursed under the SURE scheme are modest to say the least and they are finite.
On December 22, 2022, the European Commission provided an update for the scheme – Protecting jobs and workers: Commission makes final €6.5 billion payment under SURE, bringing total support to Member States to €98.4 billion – which told us that a “total of €98.4 billion of financial assistance to 19 Member States”.
On September 26, 2022, the Commission released its latest SURE assessment report – Fourth report confirms SURE success in protecting jobs during pandemic.
It said that:
1. “SURE covered around 311⁄2 million people and 21⁄2 million firms in 2020, when the pandemic broke out”.
2. “SURE was successful in cushioning the impact of the pandemic and supporting the recovery in 2021”.
3. “SURE effectively protected around 1.5 million people from unemployment in 2020”.
4. “SURE helped to enable this by financing schemes to allow firms to retain employees and skills, and to help the self-employed to be ready to resume their activities immediately”.
The point is that SURE was financed by the “Commission … issuing social bonds … and using the proceeds to provide back-to-back loans to beneficiary Member States”.
By 2022, “most Member States were no longer using SURE … monthly SURE expenditures … [fell] … to negligible amounts”.
SURE ended on December 31, 2022 and 98 per cent of the initial funding limit had been disbursed.
The largest beneficiaries (if you can call them that – debtors is more apt) – were Belgium (8.2 billion), Spain (21.3 billion), Italy (27.4 billion), Poland (9.7 billion), and Portugal (5.9 billion).
The loans will be repaid by around 2050 and interest on the 91.8 billion outstanding will total 3.4 billion euros.
There was strong support for the bond-issuance that backed the scheme – the 15-year bond issued on March 22, 2022 was “16 times oversubscribed”.
2. Next Generation EU (NGEU) programme – was touted as “more than a recovery plan” and sought to inject €806.9 billion (current prices) in green, digital and health related projects.
It was also funded by the issuance of an EU bond.
You can view the borrowing operations data at – NGEU tracker – which tells you that the EU-bonds are divided into long-term bonds with a maturity greater than 1 year and short-term bonds, less than 1 year in maturity.
So far 174,98 billion euros have been raised through long-term bonds and 77.61 euros through short-term bonds.
In terms of the long-term bonds, here is the maturity breakdown:
|Maturity (years)||Amount issued (billion euros)||Proportion of Total (per cent)|
So there is a spread across the 30 year maturity range and 10.9 per cent of the bonds will still be active up until 2052.
What does this all mean?
The debate about whether a ‘safe’ EU-bond can be sustained is continuing in Europe and elsewhere.
The intent of the European Commission was clearly to limit the schemes to be finite and repayable.
So comparing these bond issues to say the US treasury bonds or Japanese government bonds is not possible.
In the latter case (as is the case for any currency-issuing government) the bonds are essentially limitless – in that when they mature, the bond-issuing agencies, by convention rather than financial need, roll them over.
In the EU-bond case, no new bonds will be issued as the outstanding stock mature and as time passes, the ‘market’ for these bonds will become very thin indeed – which means there won’t be many up for trades and speculation.
There is also, to date, no derivatives markets (in repos or similar) stemming of the initial issues. This means that the tradeable financial ‘products’ are relatively scarce.
On January 15, 2023, the latest ECB Research Bulletin No. 103, discussed these issues – The safe asset potential of EU-issued bonds.
The report considered a “safe asset” should have three characteristics:
1. “low default risk”.
2. value retention.
3. highly liquid – “it can be sold at or near current (robust) market prices in most market conditions”. So, the holder can easily get rid of them.
US treasury bonds and JGBs clearly are ‘safe assets’ and are used in all sorts of contracts as collateral pledges.
Banks and government agencies hold these assets for various reasons – prudential capital requirements, cash surplus returns etc.
Central banks use these assets for reserve management operations (buying and selling them to manage reserve liquidity).
The European Union states do not have an equivalent and many parties wanted to see these EU-bonds becoming a quasi-safe asset.
They will be disappointed.
First, while it looked like there was a “common fiscal policy” emerging in the EU backed by the issuance of these EU-bonds, the reality is different.
They were a one-off measure and no new bonds will be issued as the emergency programmes terminate.
Further, as I wrote in Monday’s blog post – The Eurozone fictions continue to propagate (January 16, 2023) – I do not foresee the emergency relaxation of the Stability and Growth Pact measures being permanent.
Once it is perceived the pandemic is ‘over’ (whatever tha means) – the bean counters in Brussels will be pushing the Excessive Deficit Protocol for all they are worth.
Second, it is true that these bonds have low credit risk because the ECB continues to bail out the Member States to suppress yield spreads.
That has the effect of maintaining liquidity in these nations, which, in turn, will allow them to repay the loans under the EU-bond schemes.
So, think about it – the EU borrows and loans the money to the Member States – which then sell their own debt into primary markets – which is then hoovered up by the various asset buying programs conducted by the ECB – which then keeps the Member States solvent – so they can repay the European Commmission the loans.
Elongated, circuitous – like everything to do with the European Commission.
A much more sensible arrangement would be to eliminate the whole EU-bond charade and create a fiscal authority in Brussels that is directly funded by the ECB and invests in human well-being across the EU geographic span.
Sort of like Japan, the US, Australia, the UK and almost everywhere.
Would that ever happen in the EU?
Very unlikely, which is the problem.
Third, will the EU-bond market ever be liquid enough.
The ECB doesn’t think so:
… while their market liquidity has improved, it is still low relative to, for example, German Bunds … EU bonds’ prospects for becoming a genuine euro-denominated safe asset could potentially be hampered by the fact that both SURE and the NGEU programme are foreseen to be one-off, time-limited pandemic emergency responses …
This finite maturity may deter investors from establishing a long-term investment strategy in which EU bonds would be considered a permanent part of their portfolios.
The point is that the European Commission was only able to get the cooperation of Germany and Co because there was no chance these bonds would become liquid enough and permanent enough to establish the financial asset as a ‘safe asset’.
That is, the fundamental flaws in the design of the EMU persist and a temporary issue of EU social bonds has not changed any of that.
There is progress at – MMTed – as we slowly put together material within quite harsh funding constraints.
Unlike a currency-issuing government our financial capacity is extremely limited.
The MOOC is back for another run
We will be running the edX MOOC – Modern Monetary Theory: Economics for the 21st Century – again next month.
Enrolments are not open yet but we hope that interested parties can enrol from next week.
It’s a free 4-week course and at present we are scheduling it to begin on February 15, 2023.
We are working on some new material to augment the course to take into account economic developments since we designed the original course.
You will be able to learnn about MMT properly with lots of videos, discussion, and more.
I will post further details when the enrolments open soon.
A new on-line story is being developed at present, which I hope will provide material suitable for educating everything from kindergarten upwards.
I am working with an excellent manga artist from Japan on this series.
We hope to launch in February.
New MMT book now published
I am happy that a project that has been in the pipeline for some years has just been published by Edward Elgar – Modern Monetary Theory: Key Insights, Leading Thinkers.
It was a project initiated by the team at the – Gower Initiative for Modern Money Studies – in the UK.
I had the honour of speaking at the opening of GIMMS in London pre-pandemic.
I am very grateful to the team for their hard work – editorial, checking, badgering and the rest.
It is not easy dealing with a host of authors from across the globe and finalise a project more or less on time.
I have two chapters in the 12 Chapter book:
Chapter 5 – The external economy.
Chapter 7 – The Eurozone and Brexit (co-authored with Stuart Medina Miltimore who is a key player in the Spanish MMT activist group – I thank him for his excellent work in this Chapter).
Overall it is a state of the art statement on the current status of Modern Monetary Theory (MMT) from academics and activists.
It is expensive but an e-book is cheaper and available.
Music – Farewell to a legendary musician
This is what I have been listening to while working this morning.
This song (Track 1 on Side 2) – Cause We’ve Ended as Lovers – was written by Stevie Wonder.
It is one of those epic tracks – dynamic, sensitive and full of tone.
Jeff Beck, incidentally dedicated this song to another great guitarist – Roy Buchanan – who later made this song a highlight of his show and died a premature death hanging in a police cell.
Appearing on this album were:
1. Jeff Beck – guitar.
2. Richard Bailey – drums, percussion.
3. Max Middleton – keyboards.
4. Phil Chen – bass.
This article – Jeff Beck: “Stevie gave me Cause We’ve Ended As Lovers as an apology for releasing Superstition first (January 12, 2023) – provides interesting background to how Jeff Beck came to record this Stevie Wonder song.
Along with Jimi Hendrix and Peter Green, Jeff Beck is in my group of favourite guitarists.
In this blog post – Guitar mastery (January 28, 2009) – I provided some impressions of a Jeff Beck concert in Melbourne that I attended.
That is enough for today!
(c) Copyright 2023 William Mitchell. All Rights Reserved.