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Government Funding Privileges in European Financial Law : Making Public Debt Everybody's Favourite?

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  • van Riet, Ad

    (Tilburg University, Center For Economic Research)

Abstract

Since the global financial crisis of 2008 European authorities have set out to strengthen financial governance in order to create a more stable and resilient financial system. As discussed in this paper, the new and updated EU legislation addressed at a wide array of financial markets and institutions also significantly broadened the scope of the existing preferential regulatory treatment of sovereign bonds and introduced new funding privileges for governments. The many regulatory incentives for investors to buy and hold (domestic) government debt facilitate public debt management, at the cost of crowding out private sector funding and raising financial stability concerns every time the government faces distress. Moreover, a privileged access to capital markets reduces market discipline and may lead to moral hazard on the part of sovereigns. The growing scope of these government funding privileges in EU financial law may be interpreted in three (complementary) ways: as a revival of financial repression in a modern prudential guise to reduce the burden of high public debt, as a return to the traditional close relationship between the government and the financial sector so as to align mutual interests in fiscal and financial stability, or as a way to increase explicit and implicit taxes on finance and recoup public revenues lost during the financial crisis. The preferential treatment of sovereign exposures and governments’ market access is found in a growing body of EU financial law. Regulatory efforts to reduce it would have to be coordinated at the international level, take account of the financial structure and allow for a (long) period of transition to avoid market disruption.

Suggested Citation

  • van Riet, Ad, 2016. "Government Funding Privileges in European Financial Law : Making Public Debt Everybody's Favourite?," Discussion Paper 2016-045, Tilburg University, Center for Economic Research.
  • Handle: RePEc:tiu:tiucen:b1290139-3e4e-4a2d-a783-930c740f1e1c
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    References listed on IDEAS

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    Cited by:

    1. van Riet, Ad, 2017. "Monetary Policy Stretched to the Limit: How Could Governments Support the European Central Bank?," MPRA Paper 83451, University Library of Munich, Germany.
    2. van Riet, Ad, 2016. "Safeguarding the euro as a currency beyond the state," Occasional Paper Series 173, European Central Bank.
    3. van Riet, Ad, 2017. "Addressing the safety trilemma: a safe sovereign asset for the eurozone," ESRB Working Paper Series 35, European Systemic Risk Board.

    More about this item

    Keywords

    european financial reform; financial repression; regulator capture; financial stability;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F3 - International Economics - - International Finance
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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