Abstract

Enhanced cross-country risk-sharing is required in EMU in order to lower the risk of new balance of payment crises. However, it would be ill-advised to rely on mutualisation mechanisms through fiscal transfers only, as opposed to market-based mechanisms through cross-border ownership of equity capital. In the pre-crisis period, the eurozone has been suffering from “mal-integration”: flows from the core to the periphery took quasi-exclusively the form of debt rather than direct and equity investment. In order to promote a genuine financial integration within the eurozone, this paper makes two proposals. First, the European official sector should help restructuring the foreign liabilities of peripheral countries by a sort of debt-to-equity conversion. This could be done by establishing a European agency, in charge of purchasing, restructuring and privatizing state-owned assets. Second, a greater share of the German external surplus should be recycled through equity investment into the rest of the eurozone. We suggest the creation of a long term investment vehicle funded by both private sector and government savings (or benefiting from a government guarantee), and designed to take equity stakes in periphery economies.

JEL Classification: F21, F32, F36, F65