Philip R. Lane of the ECB discusses the need to expand euro-denominated safe assets through various measures, including common bonds and joint debt, to meet global demand and enhance financial stability.
Philip R. Lane, Member of the ECB Executive Board, delivered a keynote speech at the joint workshop of the European Systemic Risk Board Advisory Technical Committee and Advisory Scientific Committee on “A European Safe Asset and Financial Stability”.
He emphasized that a benchmark safe asset is essential for an autonomous monetary system, requiring high liquidity and value appreciation during stress episodes. The euro area currently underproduces euro-denominated safe assets, with the Bund serving as the main safe asset, but its stock is insufficient relative to the euro area’s size.
The euro area has seen increased resilience due to reforms such as banking capitalisation, the Single Supervisory Mechanism, macroprudential measures, and liquidity support tools like the ECB’s Transmission Protection Instrument. Despite this, the overall stock of national bonds does not fully provide safe asset services.
The recent revisions to the ECB’s EUREP repo facility aim to make euro assets more attractive to global investors and ensure liquidity provision during market stress. Common bonds backed by EU fiscal capacity could serve as safe assets, but current issuance is too small to meet demand. EU bonds are less liquid than German or French bonds.
Several options to expand euro safe assets include issuing more common bonds, financing European public goods, and joint borrowing for urgent needs like Ukraine funding. Governance challenges exist, but proposals such as joint debt frameworks and innovative governance models could facilitate expansion.
The “blue bond/red bond” reform, proposed by Olivier Blanchard and Ángel Ubide, suggests ring-fencing revenue streams to issue common bonds, which could increase liquidity and financial market development. This approach involves trade-offs, including fiscal resource allocation, but could reduce debt servicing costs.
The sovereign bond-backed securities (SBBS) proposal involves bundling national bonds into tranched securities, with the senior tranche acting as a safe asset. This method requires sufficient issuance scale to ensure market liquidity and safe asset status.
In conclusion, multiple pathways exist to expand euro-denominated safe assets, relying on incremental steps built on current institutions. Progress depends on political will and mutual trust, with a shared commitment to fiscal discipline to maintain the safety of common debt.
