Governing the Varieties of Sovereign Risk in EMU: The Rise of State-Contingent Common Public Policies

The 30-year old Maastricht Treaty on European Union (EU) is based on the political vision that a stable euro requires sound budgetary policies and sustainable public finances in all the participating countries. This paper reviews the evolving European framework for governing the varieties of sovereign risk in the Economic and Monetary Union (EMU). The main finding is that a growing body of EU/EMU public policies with provisions contingent on the state of national economies, sustainable financial integration, or effective monetary transmission, works against fiscal discipline. EU fiscal rules allow for state-contingent compliance and include ample flexibility to account for a mitigating relevant factors. EU financial governance provides public entities with a privileged access to private finance contingent on prudential considerations. The European Central Bank introduced contingent monetary policy tools for managing government bond spreads. Member States draw on EU/EMU quasi-fiscal agencies to create common contingent liabilities which escape EU fiscal oversight. The European response to the economic fallout from the Covid-19 pandemic added an EU-debt financed fiscal redistribution scheme contingent on national funding needs. Member States can also draw on this public risk-sharing tool to absorb the energy shock following the Russian invasion of Ukraine. The rise of state-contingent governance to suppress the varieties of sovereign risk in EMU marks the political transition from the Maastricht Treaty’s focus on public risk reduction to a ‘Next Generation EMU’ which favours public risk-sharing. The challenge for the future will be to balance the need to stabilise the eurozone with the need for fiscal discipline.