EU Infrastructure Bonds

EU could finance a renewal of Europe's infrastructure by means of a special new class of bond

A „European Sustainable Infrastructure Trust“ (ESIT)

could issue bonds backed by EU governments –either as a group or individually

ESIT could be managed by EIB. ESIT is a reworked EFSI – European Fund for Strategic Investments

ESIT Convertible Bonds

Key features:Zero nominal interest (‘zero coupon’)

No fixed maturity date on issuance ('perpetual' bonds)

ECB makes market (ECB always first buyer)

ECB can demand repayment any time it chooses ('puttable' bonds) – or it can defer repayment indefinitely

ECB can choose to on-sell any ESIT bond to private investors (at a discount to nominal value) after adding a maturity date to the bond

Repayment is the obligation of governments of countries that have benefited from ESIT investments (in proportion to the country's cumulative benefits received to date via ESIT spending, less previous repayments)

Repayment of bonds is NOT the responsibility of ESIT

ECB will be expected to build up a large buffer stock of ESIT bonds, amounting in volume to (say) 20% to 30% of all Euros in circulation, before on-selling or putting any ESIT bonds

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SOME TYPES OF BOND:Fixed rate Floating rateZero couponPerpetualConvertibleExtensibleRetractableInflation-linkedAsset-backedSubordinatedBearerMunicipalSovereignCorporateJames 007

SOME TYPES OF BOND:Fixed rate Floating rateZero couponPerpetualConvertibleExtensibleRetractableInflation-linkedAsset-backedSubordinatedBearerMunicipalSovereignCorporateJames 007

ECB makes market ECB „makes a market“ in ESIT bonds.

It buys a large stock of ESIT bonds, holds or on-sells bonds as it sees fit

ECB uses its large portfolio of ESIT bonds – its „buffer“ stock – to manage monetary aggregates:

ECB can withdraw money from financial circulation by selling ESIT bonds, OR by demanding repayment of ESIT bonds (functionally equivalent)

ECB can do QE by buying ESIT bonds from private investors on secondary markets

ECB can add money to real-economy circulation by buying ESIT bonds directly from ESIT

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ESIT spends, doesn‘t lend ESIT raises money exclusively by selling bonds to ECB ESIT uses money to fund EU projects

on basis of European Commission guidance

ESIT only spends. It doesn’t lend. ESIT doesn’t repay bonds – governments do. So all ESIT spending = stimulus spending

No host-country co-financing requirement. ESIT is a fiscal agent for EC

ESIT owns infrastructure portfolio in right of EU

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ESIT portfolio is anti-inflationary Capital costs of ESIT infrastructure construction are treated as sunk costs

User fees charged to public for services provided by that infrastructure need only cover operations and maintenance costs

Example: Clean energy infrastructure has high initial capital costs, but low running costs. If capital costs = sunk costs, -> clean electricity is cheap

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ECB effectiveness enhanced ESIT offers bonds only to ECB.

ECB buys bonds in amounts it decides independently on a quarterly basis

If CPI inflation > 2.0% ECB sells sovereign bonds,and ECB may on-sell some ESIT bonds

Purposes for which money is spent are decided independently by ESIT / EC

ECB has no influence on ESIT spending decisionsand ESIT has no influence on ECB monetary policy decisions

ECB's tool-kit is expanded through building up a buffer of ESIT bond-holdings. ECB’s ability to maintain price stability improves.

ECB independence is completely respected – and its powers enhanced

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ESIT spending ESIT spending is on a sunk-cost basis.

Infrastructure is built via competitive-bid, cash-on-delivery contracts to avoid cost overruns

Infrastructure may be retained in ESIT ownership, and operated under competitive-bid 'operations and maintenance' contracts

Alternatively, ESIT can- on-sell infrastructure to private investors - or transfer ownership to public bodies (municipalities, regional governments, or cooperatives)

as appropriate

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Example: EV recharging network Imagine Europe gets serious about enabling large-scale electric vehicle use

ESIT funds Europe-wide network offast-recharging stations

ESIT funds construction of battery factories and buys large stocks of lithium

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Scenario: ECB accumulates large stock of ESIT bonds in its portfolio

ECB buys several €100 billions of ESIT bonds per annum for several years

ECB discontinues Quantitative Easing. ESIT bonds programme is a superior tool – QE now redundant

ESIT spends on infrastructure until Eurozone economy revives to near full employment

ESIT spending funds / improves / extends Juncker Plan (EFSI)

ESIT funds core infrastructure for sustainability: clean energy, water, food security, transport systems, technology RDD&D & public amenities, e.g. community sports facilities

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Volume of ESIT bond stock ECB decides quarterly on volume of

new ESIT purchases (if any) subject to overriding price level stability goal

ECB's ESIT bond portfolio serves as an M3-regulating buffer stock greatly improving joint ECB, EIB and EC abilityto manage macro-economy – and carbon emissions

A large ECB buffer stock of ESIT bonds must be built up by ECB purchases from ESIT initially, before any bonds are on-sold to private investors

Target magnitude of buffer stock: Perhaps 20% - 30% of M3 – around €3 trillion? – spent into circulation via ESIT over 7 to 10 years?

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ECB accounting What if ECB on-sells some bonds? ECB then books a loss

These losses do not matter. ECB cannot go broke

ECB could demand governments „make good“ ECB's losses, but it’s pointless

Any losses can be offset in accounting terms by an ECB interest in ESIT's portfolio

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Option for regional fine-tuning Europe very heterogeneous economically

What if Region A overheats & Region B tanks?

ESIT bond portfolio management could help:

Divide Europe into Regions A, B, C, D Set up four distinct ESIT Funds Differentially increase or decrease regional stimuli ECB differentially buys or puts ESIT-A, ESIT-B, ESIT-C, or ESIT-D bonds

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Everyone wins, No-one loses ECB wins – bigger toolkit

Governments win multi-dimensionally

Private industry wins contracts

Private financiers win contracts

Workers and families win employment

Public services improve, but get cheaper too due to sunk-cost accounting

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Questions for you Is EIB / EFSI best home for ESIT?

Improvements? Congruence with existing EU laws (including Lisbon 123)?

Formal steps needed to generate actionable proposition?Write draft legislation, draft EC directives, etc.?

Whose OK is needed? How can a supportive campaign be built? Who are our allies?

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Next steps?