If ever you see a €100 banknote in the gutter, don’t bother to stop. If it were real, someone would already have picked it up. The same is true of a ruse to save the euro. Writing in the Financial Times, George Soros argues for a special-purpose vehicle (SPV) to be endowed with eurozone seigniorage rights which could be used to finance the acquisition of sovereign bonds ‘without violating Article 123 of the Lisbon treaty’.
Soros supports his case by pointing to an estimated capitalised valuation of future eurozone seigniorage, in the region of €2tn - €3tn; but the argument is fallacious because that seigniorage (whatever its value) is already discounted into the price of sovereign bonds. More detail can be found in a Lancaster University research paper.
Seigniorage income is the interest earned on assets the ECB has received in exchange for euro banknotes issued. It is allocated to each eurozone sovereign pro rata its relative economic size.
Ultimately, sovereign debt must be repaid from fiscal surpluses. Therefore, the capitalised value of expected fiscal surpluses, including seigniorage, sets an upper limit to the value of sovereign debt. As that limit is approached, default risk on sovereign debt increases, which shows in higher yields.
However, if the ECB were to divert the future seigniorage income of a eurozone sovereign into current lending (via an SPV) to that same sovereign, this would leave the capitalised value of its fiscal surpluses unchanged. Nothing would be achieved.
The Soros ruse is mere smoke-and-mirrors. Whether future euro seigniorage is regarded as an asset of the ECB, of eurozone sovereigns or of the SPV, it enhances neither the ability to support weak sovereigns and banks nor the wisdom of doing so. Future euro seigniorage cannot be used as an excuse for increasing the exposure of Germany or the other eurozone creditor countries. If a resolution to eurozone sovereign debt problems is be found, it can only rest with some combination of debt write-offs and fiscal austerity.
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