Lane: Expanding euro safe assets crucial for stability
Philip R. Lane, Member of the Executive Board of the ECB, emphasized the need to expand the supply of euro-denominated safe assets. He outlined several proposals to strengthen the euro area's financial architecture and global standing.
The euro's safe asset deficit
Lane highlighted that the current euro area financial architecture leads to an undersupply of euro-denominated safe assets.
The German Bund, while serving as the de facto benchmark, is too small relative to the euro area's size and global financial system demand.
While national sovereign bonds contribute, their remaining price movements prevent them from fully providing safe asset services.
Reforms like increased banking system capitalisation, joint supervision via the Single Supervisory Mechanism, and macroprudential measures have enhanced resilience, reducing inter-country spread volatility.
Additionally, revisions to the ECB's EUREP repo facility aim to make euro-denominated assets more attractive to global investors, ensuring timely liquidity provision for central banks outside the euro area and strengthening global trust in the euro amidst geoeconomic fragmentation and uncertainty.
Pathways to common debt
Lane explored avenues to expand common bonds, noting their potential for safe asset services if backed by combined EU fiscal capacity, but current volumes are insufficient for market liquidity.
He suggested financing European public goods, like defence, through more common debt, similar to Next Generation EU.
This approach, however, faces governance challenges, especially when programme participants don't align with full EU membership.
Innovative governance models, such as those by Hildebrand, Rey, and Schularick for shared defence financing, could help address these issues, potentially expanding euro safe assets.
Political will is the missing piece
The proposals for blue bonds and sovereign bond-backed securities offer technically sound pathways to address the euro area's safe asset deficit.
Yet, their success hinges entirely on the political will and mutual trust of Member States to commit to deeper fiscal integration.
Without this shared commitment, the euro area's financial architecture will remain suboptimal.