What to Do About Eurozone Sovereign Debt
Now more than ever, the European Stability Mechanism should be adapted to manage eurozone member states' sovereign debts. Otherwise, the bloc's financial stability will be jeopardized, and governments will end up being penalized simply for supporting their citizens through the pandemic.
ROME/EDINBURGH – The eurozone needs a new common policy to manage the sovereign debts accumulated by member states in response to the pandemic. The European Central Bank currently holds a large share of these debts, but it will need to unwind them when monetary-policy considerations warrant it.
Whenever that process begins, it may cause turbulence in eurozone financial markets. That, in turn, would increase the cost of rolling over public debt, raising the specter of systemic instability in a banking sector that will have already been weakened by a new wave of nonperforming loans.
Owing to these concerns, ECB-held public debt should be kept out of financial markets indefinitely, by having the European Stability Mechanism purchase ECB-held government securities with funds generated by issuing its own euro liabilities. This can be done without any ESM Treaty changes, and without breaching treaty restrictions on debt mutualization.