The Political Economy of Euro Area Sovereign Debt Restructuring

26 Pages Posted: 4 Feb 2021

See all articles by Friedrich Heinemann

Friedrich Heinemann

ZEW – Leibniz Centre for European Economic Research; University of Heidelberg - Alfred Weber Institute for Economics

Date Written: 2021

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 a SDRM and with hidden transfers. Recent European fiscal innovations in response to the Covid-19 solvency shock confirm this prediction.

Keywords: sovereign debt restructuring mechanism, banking regulation, EMU reform, fiscal union

JEL Classification: H63, H87, F53

Suggested Citation

Heinemann, Friedrich, The Political Economy of Euro Area Sovereign Debt Restructuring (2021). ZEW - Centre for European Economic Research Discussion Paper No. 21-004, Available at SSRN: https://ssrn.com/abstract=3779149 or http://dx.doi.org/10.2139/ssrn.3779149

Friedrich Heinemann (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
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D-68034 Mannheim, 68034
Germany

HOME PAGE: http://www.zew.de

University of Heidelberg - Alfred Weber Institute for Economics ( email )

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Heidelberg, D-69117
Germany

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