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30th Mar 2020

Rehn backs 'smart' mutual debt fund

  • The European redemption fund is a "smart" idea, says Rehn (Photo: ec.europa.eu)

The idea of mutualising eurozone debt remains as controversial as ever but economic affairs commissioner Olli Rehn has spoken out in favour of a halfway house solution, whose authors say will solve the "impasse" between opposing ideological camps.

The idea would see countries with a sovereign debt of above 60 percent of GDP - breaching single currency rules - pooling this excess debt into a redemption fund.

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The countries would be obliged to undertake structural reforms and growth-inducing measures and pay their debts back over 20 to 25 years.

"While I would not want to mix this with eurobonds proper, I find the proposal smart, potentially do-able and certainly worth exploring further," Rehn said during a hearing on eurobonds in the European Parliament on Tuesday (10 January).

He made similar remarks in November but the views carry more weight now since a public consultation on eurobonds - in response to a commission discussion paper on the issue - has come to a close.

The European redemption fund idea was drawn up by the German government's panel of independent economic advisors.

Professor Christoph Schmidt, a member of this panel and also present at Tuesday's discussion, said the idea would allow for an "emotionally detached" discussion on the idea of pooling debt.

To date, debate on the issue has pitted financially sound countries who worry about moral hazard against those who feel there should be more solidarity shown towards troubled euro members. Germany, who is calling the shots in the eurozone debate, is the most firmly opposed to eurobonds. But its opposition has not stopped the idea from re-surfacing - with both sides angered by the others' intransigence.

"We are trying to build a bridge," said Schmidt on the divide between the two camps.

He said the idea had an inbuilt "safety valve" in that partaking countries would have to pledge to cover their debt with part of their national currency reserves, which he noted would not be easy to get past the domestic voter.

Other conditions would see the countries implement a constitutional debt brake, undertake fiscal consolidation and structural reform. Non-performing countries would be kicked out the scheme while those already in an external aid programme, such as Greece, could not take part in it.

The low refinancing rates, said Schmidt, would allow potentially troubled countries some "breathing space" with nervous markets already driving up the borrowing rates in several eurozone countries.

Speaking generally about the eurozone debt crisis, which has rolled on for two years without European politicians being able to stop it, Rehn said the euro remains a "prime political project."

He drew flak from MEPs from Ireland and Portugal - countries both subject to EU-IMF bailouts and undergoing swingeing spending cuts - for focussing on austerity measures without putting forward any concrete ideas for growth.

Rehn remained unapologetic however, noting that "no amount of fiscal stimulus" will solve the crisis unless the "crisis of confidence" in the markets is first solved through deficit reductions and rules-based economic governance.

"You cannot solve a debt crisis by piling up more debt," he said.

He pointed to countries such as Finland and Sweden who carried out painful fiscal consolidation in the 1990s. They came through, said Rehn - himself a Finn - because they ring-fenced spending on education and innovation.

Brussels sees no serious opposition to eurobonds

The European Commission has launched a polemic on eurobonds - a proposal that eurozone countries should guarantee one another's debt, taking member states into uncharted territory in terms of solidarity and trust.

Italy sides with Germany against eurobonds

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EU commission to present eurobonds plans next week

In a bid to stem the tide of the debt crisis engulfing the eurozone, the twin leaders of the European Union, Herman van Rompuy and Jose Manuel Barroso, have announced plans for further integration.

Germany backs pooling of debt, no joint liability

The idea of a debt redemption fund for eurozone countries is not completely unpalatable to the German government, provided each state remains liable for its own debt, a German finance ministry official has said.

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