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Indiana University strengthens tomorrow's workforce with practical, real world experience. IU grads make a difference in your community, serving as teachers, nurses and engineers who rise to tomorrow's challenges and meet them. Learn more at iu. Edu Impact Bloomberg Audio Studios Podcasts Radio News One of the key recommendations of Mario Draghi's report into restoring Europe's competitiveness was issuing more common EU debt. Several key European countries are against that idea and it's become part of the debate over the next seven year EU budget, which is currently being negotiated. So how important is common debt to Europe's future? Let's get an investor perspective now from Angel Ubide, who is head of economic research for Global Fixed Income and macro citadel. Angel, you've worked in financial services for some two decades. You're also a member of the Spanish government's Advisory Council on Economic Affairs. I wonder when you think about this in the context of the Draghi report, the conversation that has been ongoing among EU member states about common debt for many years now, why is now the time that more joint debt needs to be agreed?
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B
So I think there are three reasons why now is the time, right? The first one is the need. And the need is really related to the need to achieve a strategic autonomy. It's very difficult to have strategic autonomy if you don't have the military, the financial and the economic power. And you cannot have the financial and economic power if you don't have a safe asset denominated in your own currency. Right now Europe is built on a safe asset denominated on US dollars, essentially, and that cannot be a robust and stable base. The second is the opportunity, because there is a lot of demand for European debt. When I go around the world, I can tell you I have lots of conversations with other investors and there is always the issue about we would increase our holdings of euros in our reserves, in our portfolios, if there were euro bonds. And then the third, as we discussed, is that there is also the institutional support. The ECB has become much more proactive in the promotion of the idea of the international role of the euro. But it's very difficult to have an international currency if you don't offer investors what they want and what they want. It's a safe asset that is deep, that is liquid and that is in large size. So I think those three elements are the reason why now is the time.
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A
Do you feel the pressure from the Trump administration on the EU over defence, over trade could help to perhaps encourage those reluctant countries to get on board with the idea? Given the context that you've outlined, at least indirectly, right.
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B
If this is forcing a conversation really about the strategic autonomy, about how to make Europe more independent and more robust, then one of the elements has to be this. Whether it's going to be the deciding element or not, I don't know. But it is forcing a conversation about this, definitely.
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A
If you were putting a room in front of reluctant European leaders to talk about this, what is the key point you'd want to be driving home to them for those who are still, still not on board the idea?
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B
Well, I guess it can be done in a couple of ways. One part of those who are against would say, but we have German bonds. Why do we need Euro bonds? And the answer is, well, German bonds are small. And when you push it, really, German bulls are the safe asset of Germany, are not just the safe asset of Europe. We need a safe asset that belongs to the whole of Europe. And then I think the second is that if you want to really be independent, you need to have your own asset. And as I said, you cannot build the foundations of your financial sector with an asset that is denominated in a foreign currency, where you are going to have foreign currency risk, where you are going to depend ultimately on a foreign payment system, clearance system and financial system. At the end of the day, you need those two things. Without that, you are never going to really achieve a strategic autonomy.
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A
So would the creation of these Eurobonds, as you described them, reduce demand, though, for some of the sovereign debt as well? Because that's another argument that can be made at a national level, is that your own national debt is going to get more expensive because some of those investors are going to be looking at the new common EU debt.
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B
So during the transition period, there could be wiggles, right? It always happens. But in the long run, our view is, is that it is going to increase the total demand for European assets. So it's not necessarily going to cannibalize national bonds, but it's going to add to it. Let me give you a specific example. Right. Right now, the euro bonds that are existing, the EU bonds and bills are considered supranationals. They are not considered sovereign bonds. If and when these EU bonds and bills would become sovereign bonds, as we support, because of increased size and increased clarity about future issuance and all that, it would be an additional asset that foreign investors could buy. So it would then be instead of. It would be in addition to. And so in a steady state, we would think because of that and because it would also make the European economy more stable, and therefore it would reduce the risk associated with all of the bonds. Within that, the average interest rate of funding the debt in Europe would come down.
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A
How should the debt be paid for? There's already an issue with the current joint debt that was issued during the COVID pandemic by the EU and for the recovery fund. You know, there's meant to be new EU taxes, own resources, as they're known in the EU budget, to be able to pay for them. That money hasn't materialized and it's now a big blocking point in the current EU budget negotiations. Where should the resources come from to pay this?
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B
So we solve, quote, unquote, that problem by avoiding the need for new resources and proposing that this debt would be supported by a transfer of existing resources at the national level. The same way that we don't argue that we should be issuing this debt for new spending programs, because those should be two different decisions. We are not arguing that new taxes should be created because again, those should be two different decisions. So the way we articulate this is each country would agree and commit to transfer a share of their own tax revenues to the service of these Euro bonds, and those would be the resources. So we are not proposing to increase the debt and therefore we don't need to increase the resources.
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A
Can you give me sort of two contrasting scenarios of if the EU did this and if they didn't, what's the sort of benefit for the European economy if this instrument is created and what would happen if it's not done and we continue on our current path?
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B
So I think the benefit is, we assume, and we expect, and I think we are, we are on a strong basis on this, that the cost of funding for the European economy would come down and that at the margin increases potential growth. It also creates more stability. It almost eliminates the possibility of a run on any of the countries. Right. Of course, nothing can be ruled out. Any country, not just in the Eurozone, any country in the world can one day decide to misbehave. And that consideration should always be there. But when we put this thing together, it provides the European economy with an instrument that is just going to increase the stability. Now, if we don't have it, life continues as it is today. But then it is going to make the European economy again hostage to a foreign denominated asset in a world in which all the main regions are moving forward towards some sort of, and I'm going to use the word strategic autonomy, investing in all the critical sectors, in all the critical materials not just defense, but energy and artificial intelligence and everything else. The euro area is going to be the one with the weakest foundation if it doesn't have euro bonds.
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A
Traditionally, it's the more centrist governments that have agreed to big advances towards more integration at European level, which of course, this would be another step towards. Would you be concerned that if there are populist governments elected, you know, there are big elections coming up, for example, in France next year, that it would take this idea completely off the table?
- [08:59]
B
Well, I would hope they don't. I think we still have to do a fair amount of explaining. We have to convince not just those parties, but everybody that this is in the benefit of every single European citizen. Right. Is leaving money on the table. Or as the Spanish Vice President and Minister of Finance Carlos Cuerpo said at an event recently at the Peterson Institute in Washington, is saving taxpayers money. And I think we should all agree that saving taxpayers money should be a priority for all European leaders, and that would be the way to do it.
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A
Can investors have confidence that this money would be spent effectively if this new debt is raised? The EU's Court of Auditors has already asked a lot of questions about where billions of the COVID recovery money which came from the EU was spent by member states.
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B
So we avoid this problem here by not associating these euro bonds to any particular spending program. That's why we do it as well. So all we are doing here is optimizing debt management, is reducing the cost of debt. We are not adding a euro to the current stock of debt. Now, if in the future European leaders decide to create a program of European public goods which means increasing spending, and they want to fund it with euro bonds, it's absolutely fine with us. But that is not what we are proposing. So our proposal does not run into the risk that the money will be misspent because we are not proposing to increase spending.
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A
I want to ask you about some of the other big issues identified in the Draghi report as potential blocks on growth and increasing Europe's competitiveness. One of them is the massive stock of money that is in savings accounts across Europe. We don't have the same investment culture in Europe that there is in the United States. How easily can that be changed? And is it just fiscal levers that need to be used by governments, fiscal incentives to try and get that money moving out of savings accounts and into more productive investments?
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B
So that's an issue. Right? There is this line that says that if you have sleepy deposits, you are going to have a Sleepy economy. And yes, I think we need to change the attitude towards risk, towards investment across European citizens. There are different ways to do it. One option I have proposed, I've been living in the US for many years and I think one of the reasons why American citizens have a more benign attitude towards risk is that they have to invest in their own 401 accounts, the private pillar of their pension. Because you have to do that, you get used to having a part of your savings in equities and then you are more used to seeing volatility. But at the same time you are also channeling a lot of these savings into productive investments. So one way to change this attitude in Europe would be to also promote the adoption of a private pillar in pension funds. That would not only make people more open probably towards private and risky investments, but it would also channel that money that is now basically sleeping in bank accounts that are then investment in government bonds. It would channel it towards, towards private investments.
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A
But to do that, do we need to be a bit more, perhaps open, some might argue, realistic about the future of state funded pensions in Europe as well. The demographics aren't good in many countries. I think the conversation anecdotally that many people will have is there'll be no pension for me when I retire from, from the state. Do we need to say that more seriously? Do we need to hear that more from leaders and from, you know, big investment houses like yours?
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B
Well, I think when you look at the way the European Commission does the long term projections for fiscal sustainability, there is the fiscal projections and then there is what they call a demographic component. Right? And they claim that, all right, the demographic component has to be taken into account as well with either spending cuts or tax increases today. One way we could deal with this is, is to say that that demographic component could be dealt with with a private pension pillar. Now there is a transition issue. There is always a transition issue when these things happen. So there is a cost to it. It's a one off. But I think it's a good investment into the future because at the margin this would also increase potential growth for the European economy because there would be more funds that are channeled towards more productive activities in the private sector.
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A
I mean, are pensions a time bomb for the European economy?
- [13:47]
B
Well, they are a time bomb everywhere, right. When you look at the demographic profile, even in the United States, birth rates now are below the replacement rate. So that's happening everywhere. Everywhere. There is going to have to be some adjustments. And I think one way to make these adjustments in A productive manner is to think at the private pillar.
- [14:09]
A
Just a question too about the finance industry across Europe as well. We don't have the big cross border banks that there are ambitions to have, certainly at a level in Brussels. And every time it seems that we've talked about a big bank merger, we've had interventions from governments at a national level to try and either dissuade or prevent in some cases. I mean, how do you reconcile these positions? You can make the arguments that big banks are important, but it really feels like that voters and national governments don't want to listen to.
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B
Well, I'm going to quote my fellow Spaniard, Luis de Gindos, who gave an interview over the last couple of days, basically saying that what is happening, the merger between UniCredit and Commerce is an example of this. If we don't create European banks, it is going to be almost impossible to have a European capital market. It's not just a question of size, and size is very important, but it's also a question of channeling the savings across the different countries. Investment is a relationship business. You need to know the people. You need to have the trust of the savers and the trust of the investors. I always say if you have savers in Andalusia in Spain and you want to convince them that there is a very good investment opportunity in the north of Germany, you need to know both. And you are not going to be able to do that if you are just a domestic bank. You are going to need to have European banks with presence everywhere. The same way that the US has interstate banking that is across the whole continent of Europe and that they can move the savings around to the most productive investments.
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A
Has the EU at an EU wide level done enough to encourage that? Does more need to be done to facilitate the creation of those sorts of banks?
- [15:57]
B
Well, there is one argument, right, that there are barriers to liquidity across countries. And this is not a question of regulation. It may be more a question of supervision. It may be also a question of domestic political needs that each country might think that it needs to have its own national champions. It's a bit the same story as the Eurobonds, right? Enrico Letta, former Italian Prime Minister, always says that there are countries that are small and countries that don't know they are small in Europe. And I think we need to overcome that. We need to think that the way to face the current geopolitical competition with the U.S. and with China is with more Europe and more Europe requires creative European banks and European champions.
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A
And just to Conclude. What's your biggest concern for the future of the European economy right now?
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B
I think my biggest concern is that European leaders don't realize that both China and the US have hit the ground running in the competition for military, for security, for energy, for resources, autonomy. There is a tremendous amount of investment that is being put to play. And I worry that in Europe we are going to continue to wonder more about the rules and about the intra European differences than about what it needs to be done in order to win this race. I always have this feeling that in Europe we worry much more about the internal enemy than about the external one. We always worry about whether Italy is going to do this or France is going to do that, rather than wondering how do we compete in the global scene. And is that process, that delay that worries me because by the time Europe wakes up, it might be too late.
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A
How far behind is Europe in that race?
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B
Well, it's difficult to measure, but there is one number which is in the drag report, right? 5 trillion euros of investment. And the Dragon report is what, two years old? So maybe we are two years late.
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A
And I suppose I've asked you about your worries, I'm obliged to ask you as well. What are you most optimistic about? Where do you draw hope from the current conversation?
- [18:17]
B
I think Europe has a lot of upsides. One thing that I think people underestimate is that when you measure it properly, and I know there has been a lot of talk here about whether European GDP is lagging the US by a large amount, but a lot of that is this change rate evolution, right? When you measure it properly. Over the last 25 years, GDP per capita in Europe has only been around 1 or 2, 10 less than in the US on average. Right? That's not much. So that's the good news. And that's the good news because that has happened despite the fact that we have a big and deep Euro crisis that was a massive headwind for Europe. Despite all that, Europe hasn't lost much distance with respect to the us. What that means is that if we can avoid a crisis over the next 10 years, and if we do the investments we need to do, I think the future is bright. It's just a question of wanting to do it, of believing in it and getting to it.
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