Abstract
The establishment of a sovereign debt restructuring mechanism (SDRM) is one of the important issues in the academic debate on a viable constitution for the European Monetary Union (EMU). Yet the topic seems to be taboo in official reform contributions to the debate. Against this backdrop, the article identifies the SDRM interests of key players, including the European Commission, the European Parliament, the European Central Bank and national governments. The empirical section takes advantage of the recently established EMU Positions Database. The findings confirm political economy expectations: Low-debt countries support an EMU constitution that includes an insolvency procedure whereas a coalition of high-debt countries and European institutions oppose it. The analysis points towards a possible political-economic equilibrium for coping with sovereign insolvencies: an institutional set-up without an SDRM and with hidden transfers. Recent European fiscal innovations in response to the Covid-19 solvency shock confirm this prediction.
Highlights
The potential role of debt restructuring mechanisms in the constitutional set-up of the European Monetary Union (EMU) has received considerable attention from academics
The paper is highly ambitious with respect to the completion of the banking union (European Deposit Insurance Scheme), new debt instruments, a new macroeconomic stabilization function, the establishment of a European Monetary Fund (EMF) or the establishment of a euro area Treasury
Countries that wanted to benefit from European Stability Mechanism (ESM) assistance and, possibly, subsequent European Central Bank (ECB) assistance through the Outright Monetary Transactions (OMT) program had to sign detailed memoranda of understanding on consolidation measures and structural reforms defined by the “Troika” (European Commission, ECB, and IMF)
Summary
The potential role of debt restructuring mechanisms in the constitutional set-up of the European Monetary Union (EMU) has received considerable attention from academics. One obvious explanation for this reticence of European political institutions is the fear that the mere existence of an SDRM could destabilize government bond markets. This article provides political economic explanations for the divergent positions taken by various parties on explicit sovereign debt restructuring in a future EMU. It covers the following key players: the European Commission, the European Parliament, the European Central Bank (ECB) and the governments of high-debt and lowdebt euro area countries. The political economy of an SDRM has received substantial academic attention in the context of the IMF model for developing and emerging countries proposed in 2002 (Krueger 2002). The US administration under President George Bush favored contractual market-based solutions instead of a statutory restructuring mechanism and, pushed the use of Collective Action
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