The Eurozone’s Evolving Fiscal Ecosystem: Mitigating Fiscal Discipline by Governing Through Off-Balance-Sheet Fiscal Agencies

Andrei Guter-Sandu,Steffen Murau

doi:10.1080/13563467.2021.1910648

Abstract

ABSTRACT The original Maastricht regime designed the Eurozone’s fiscal segment in a way that sought to keep member states’ treasury budgets balanced by disciplining them through market forces, reducing the overall volume of public indebtedness, prohibiting monetary financing, and avoiding that Eurozone treasuries bail each other out. In this article, we analyse how these ‘neoliberal’ rules for fiscal governance have been gradually superseded by an alternative approach that we call ‘governing through off-balance-sheet fiscal agencies’ (OBFAs). OBFAs are special purpose vehicles that complement treasuries in supporting public investment, offering solvency insurance for banks, providing capital insurance of last resort for other treasuries, and expanding the stock of safe assets. By sponsoring OBFAs, treasuries can substitute ‘actual’ liabilities on their balance sheets, which are potentially in conflict with the EU’s neoliberal fiscal rules, with ‘contingent’ liabilities – guarantees that do not appear on-balance-sheet. Together, national and supra-national treasuries and OBFAs form a ‘fiscal ecosystem’ in which neoliberal fiscal rules get re-emphasised but in practice are increasingly mitigated. This new mode of Eurozone fiscal governance is reflected not only in multiple policies implemented since 2010 – the Recovery and Resilience Facility for example – but also represents the main strategy in many Eurozone reform proposals.

Highlights

The Coronavirus pandemic saw the Eurozone mobilising unprecedented sums of money to deal with its fallout
We focus on three countries – Germany, France, and Italy – as representations of Eurozone countries with current and financial accounts that are in surplus, balanced, and deficit, respectively; still, the model could be extended to all Eurozone countries (EMU-19)
The current official strategy to tackle the perceived safe-asset shortage in the Eurozone through a supranational securitisation vehicle is indicative of the new mode of governance through off-balance-sheet fiscal agencies’ (OBFAs), whereby off-balance-sheet instruments are created to overcome the issue of shortage of safe assets and to mitigate the no-bailout clause inscribed in the neoliberal rules of fiscal governance

Summary

Introduction

The Coronavirus pandemic saw the Eurozone mobilising unprecedented sums of money to deal with its fallout. The third section theorises the mode of governance through OBFAs and shows with the help of balance sheet examples how it mitigates the neoliberal rules in four different activities that treasuries usually carry out: OBFAs support public investment, offer solvency insurance for banks, provide capital insurance of last resort for other treasuries, and expand the stock of safe assets. This applies both to policies that have already been implemented and policies that are currently being processed or discussed. The current official strategy to tackle the perceived safe-asset shortage in the Eurozone through a supranational securitisation vehicle is indicative of the new mode of governance through OBFAs, whereby off-balance-sheet instruments are created to overcome the issue of shortage of safe assets and to mitigate the no-bailout clause inscribed in the neoliberal rules of fiscal governance

Conclusion

Findings

Notes on contributors