So the Eurozone is getting its $ 1 trillion “shock and awe” rescue package and markets are responding with enthusiasm. There has been a lot of discussion about this package, but one potential implication of this plan that has received little attention is that it may put in motion the beginnings of a Euro treasury market. Among other things, the plan calls for the creation of special purpose vehicle that will be able to raise up to $440 billion by issuing debt backed by the Eurozone countries. This description sounds to me a lot like a centralized fiscal authority for the Eurozone. Yes, it has been given only a three-year life, but once folks see that this entity is essentially a Eurozone Treasury it could morph into something more permanent–especially if it plays a key role in preserving the monetary union. And if that happens, a Euro treasury market will emerge that could provide stiff competition to the U.S. treasury market. Moreover, should there arise a Euro Treasury then the Eurozone will have eliminated a key barrier that prevents it from being an optimal currency area.
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