Eurozone Reform Proposals Are Well-Balanced

At their most recent meeting, the European finance ministers have agreed on a reform proposal for the monetary union. Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at the Centre for European Economic Research (ZEW), comments on the reform deal.

“The proposals for the reform of the Eurozone that Eurogroup presented today are well-balanced. On the one hand, the proposals include plans to introduce new instruments as part of the European Stability Mechanism (ESM) with the aim of providing a sound financial basis for the banking union. Furthermore, the finance ministers have called for the creation of a common Eurozone budget.

By themselves, these changes would most likely increase the risk of socialising the debt of those states that have an unsound financial position. On the other hand, however, the finance ministers have included a crucial correction to mitigate this risk. In their agreement, the Eurogroup also recommends that government bonds of euro states be issued with improved collective action clauses from 2022 onwards. What is more, the ESM is to oversee negotiations between highly indebted Eurozone countries and private creditors. The introduction of these rules are a clear indication for initial preparations of a structured insolvency procedure for euro countries. This is a very welcome step, since only credible insolvency regulations can ultimately prevent taxpayers from having to bail out bankrupt Eurozone states.

The message for the bond markets is clear and will be heard: Investments in government bonds of Eurozone countries with excessive debt levels have a significant risk of default. The agreement reached today is likely to further increase the pressure for market discipline in countries like Italy.”