How to finish building the eurozone

The European Commission will publish today a paper on completing the EU’s economic and monetary union, which includes an option for a debt product called “European Safe Assets” (ESAs).

The overall goal of the paper is to restart convergence between Europe’s richer and poorer economies, which has stalled since 2009.

It is the latest instalment in a series of reports which flesh out the March 2017 “Future of Europe” policy white paper, and it will face the red pens of national leaders only at a December 2017 summit.

Based on the Commission text seen by POLITICO’s Brussels Playbook, short-term proposals are offered in detail while longer term proposals are left open-ended.

The issue that will gain most headlines today is the longer-term option for “European Safe Assets” (ESAs).

ESAs are the Commission’s way of describing financial debt products that are nearly (but not actually) like eurobonds. A eurobond would mutualise the debt of national governments, an ESA would not. According to the Commission’s paper ESAs “could create numerous benefits for financial markets and the European economy.”

This idea sits within a basket of Commission longer-term options reducing and sharing sovereign debt risk, and is driven by the conviction that the EU lacks a safe asset on par with US treasury bonds, which could help calm markets in times of crisis.

Between now and 2019 the Commission would like to see “sovereign bond back securities” created that would work by “pooling and tranching” sovereign bonds. The purpose is for banks to reduce their risk in buying the bonds, without requiring politically controversial debt mutualization nor regulatory changes.

In general the report avoids concrete recommendations, preferring to create a catalogue of policy options building on a 2015 report known as the “Five Presidents Report” (The five presidents being Jean-Claude Juncker, Donald Tusk, Mario Draghi, Jeroen Dijsselbloem and Martin Schulz).

Another top issue is governance reform.

Commission officials Playbook spoke to said that much of the necessary architecture is in place for a fully functioning eurozone, but they worry it was built so quickly and in a time of crisis that it is unsuited to the EU’s long-term needs.

Top of that list is fixing how the presidency of the increasingly important Eurogroup of finance ministers operates.

A favored option in the Commission’s Berlaymont headquarters is creating a post that mirrors Federica Mogherini’s EU foreign affairs role. Instead of being and unpaid and scarcely resourced presidency, the Eurogroup would instead be run by a eurozone finance minister with a foot in each of the Commission’s and the Council’s camps.

There will also be references to a eurozone budget, an idea supported by French President Emmanuel Macron, and to the creation of a European Monetary Fund (EMF). POLITICO’s Commission sources said that the creation of an EMF would likely face a skeptical reception in the Commission and Parliament.

Others ideas to be floated in the Commission’s paper include:

— A European Investment Protection Scheme (to act as a buffer for public investment in the event of a severe economic downturn)

— A European Unemployment Reinsurance Scheme (which would act as a “reinsurance fund” for national unemployment schemes, to prevent blowouts in national budget deficits in times of high unemployment).

— A “rainy day fund” — which sounds a lot like a sovereign wealth fund to Playbook — is given a warm reception in the Commission paper.