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The shape is beginning to take shape through the mist that veiled global markets during President Donald Trump’s second coming. If you squint, you can get an overview of how Europe challenges the centrality of the dollar in global finance and what its disjointed government bond market reforms will look like.
This is a sometimes raging process, long and stud-sounding. After all, it’s Europe. However, the question of whether to give the euro a growth up and make it more suitable for the global official reserves has come to an end. The answer is yes. I’ll come right now.
One possible answer is to do nothing. The Eurozone can use its defects to its advantage. Rather than providing one huge unified government bond that each member supports and supplies spending in each state, they can stick to what they already have. Some large investors who like its diversity may be able to sell it as a virtue to state support managers of huge cash pools around the world.
But “maybe” is doing something serious and heavy there. While this view has its merit, most flavored Eurocrats and bankers in the EU have generally put more effort into thinking how much better it would be to join forces and challenge a fairly large, smoother, faster mobile market for US government bonds. This is clearly a live discussion.
“We are having this permanent discussion about joint borrowing,” said Michael Clauss, German ambassador to the EU, at a Financial Times event held in Berlin this month. “The meeting of EU government representatives) has not been reminiscent of the last 12 months or so without mentioning euro bonds or creating ideas for joint borrowing,” he added.
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Ultimately, this becomes a political decision. But the drumbeat of helping Europe move here has grown loudly, including Christine Lagarde, the European Central Bank who wrote this month at the “Global Euro” moment. In part, as Lagarde wrote, it depends on the already important role of Europe in global trade and the use of the euro as a claim currency.
This is often overlooked, but it is extremely important. This is because the dollar’s even bigger function as a global billing currency is closely linked to the vast slices of global reserve assets. “It’s not just a management decision,” Barclays currency analyst Themos Fiotakis said at a briefing this week, and that he would lean assets to reserve assets that are far from the dollar. “It’s “I’m not mad at President Trump, I’m going to revenge by buying the euro.” Instead, he said this follows an “ancient recipe” that saves money on rainy days and provides liquidity to keep trade in jeopardy. Logically, more trade in the euro outside of Europe will feed a stronger case for more euro reserves.
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Again, we’ll be back to where those reserves go and what the dominant euro assets are. Regarding that question, this month’s ECB chief economist, Philip Lane, caught a prominent attention on the “Red Bond/Blue Bond” framework, which was first sketched back to 2010.
This includes Euro member states ringing revenue streams and using them to serve common “blue” bonds.
Due to a lack of political support and good reasons, the idea did not fall off the ground in 2010. Not to mention the states of a full-scale solvency crisis, driving by bus at the time the safer Euro members, especially the gap between Benchmark and Bedrock Germany’s borrowing costs and weak links such as Italy. Given these spreads, why should Germany register at an unreasonable high cost? It was difficult enough to keep Greece in the eurozone without adding another layer of potential conflict.
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But now the spread has disappeared. As Lane says, the “financial architecture” of the euro is much more robust, its banking system is better capitalized, and various imbalances have been resolved. So he continues, “Structural changes in the design of the Euroarea bond market will drive stronger global demand for Euro religion’s safe assets.”
Some bankers have the European banking unions that are incomplete, their capital market unions are unfair, bankruptcy laws are compatible from state to state to state, and the US is just working. It’s all true, but the idea of ”blue” union – also trumpeted by financial heavyweights Olivier Blanchard and Angel Ubide in a Peterson Institute paper – offers, at least, the possibility that a perfect man will not be allowed to become the enemy of good.
Bluebond may not be a place on all this land. But in some way, it’s time for European politicians to grasp this nettle. It is worth noting that the debate has moved from praised Europe for problems that fall below its weight to finding ways to fix it.
katie.martin@ft.com
