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A national public bank to finance a euro zone government: Getting the funds for investment and recovery packages

Author

Listed:
  • Oliver Picek

    (Department of Economics, New School for Social Research)

Abstract
A national public bank may be used to finance the national fiscal policy of a country within the euro zone. The bank would only hold domestic government bonds. It would get its funds from the Eurosystem, pledging government bonds as collateral. The publicly owned bank would apply for funds like any other bank, legally not violating the prohibition of monetary financing provision in EU treaties. Effectively, as the profits of the bank are returned to the government, interest on newly issued bonds can be saved, freeing up additional resources for government spending and investment. The biggest risk to the bank is a margin call by the national central bank in response to a fall in the market price of government bonds. A rule change in the ECB collateral scheme is proposed to remedy this risk. Then, a public bank could insulate the national government from buyer strikes and allow the state to pursue an adequate fiscal policy to create employment while debt servicing costs remain subdued.

Suggested Citation

  • Oliver Picek, 2015. "A national public bank to finance a euro zone government: Getting the funds for investment and recovery packages," Working Papers 1512, New School for Social Research, Department of Economics.
    • Handle: RePEc:new:wpaper:1512
    as

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    File URL: http://www.economicpolicyresearch.org/econ/2015/NSSR_WP_122015.pdf
    File Function: First version, 2015
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Government Finance; Euro Crisis; Public Bank; Euro Area; European Central Bank; Financing Stimulus; Fiscal Policy; Public Debt Reduction; Monetary Financing; Government Bonds; Public Investment; Government Spending;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H1 - Public Economics - - Structure and Scope of Government
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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