Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/309559 
Authors: 
Year of Publication: 
2023
Citation: 
[Journal:] Finance and Society [ISSN:] 2059-5999 [Volume:] 9 [Issue:] 2 [Year:] 2023 [Pages:] 39-57
Publisher: 
University of Edinburgh, Edinburgh
Abstract: 
European financial regulation consistently gives governments privileged access to private investors, reflecting the anchor role assigned to sovereign securities as safe and liquid assets for the financial system. Legislative reforms after the financial crisis of 2008 further expanded the preferential treatment of sovereign securities as zero-risk claims, introduced portfolio requirements in favour of public debt, and constrained market speculation against governments. These sovereign privileges appear counterproductive for fiscal discipline and financial stability: they encourage excessive public debt issuance and make financial institutions holding government bonds - in particular from euro area countries with a variable risk profile - vulnerable to fiscal turbulence. Governments seem to have a conflict of interest. On the one hand, they are prudential regulators of financial risk-taking, on the other hand, they tend to overlook the financial sector's exposure to sovereign risk. This article considers four theories of the state-finance nexus and their solutions to this conflict of interest. The money view, the franchise view, and the modern financial repression view draw on the state's monetary and regulatory powers over finance to confirm sovereign safety. Their positions fundamentally contrast with the neoliberal view, which relies on free markets to enforce sustainable public finances. The article concludes that sovereign privileges present a fundamental dilemma for European financial governance with a neoliberal orientation: they oblige private investors to hold public debt, while weakening the role of markets in promoting fiscal discipline as the very foundation of sovereign safety.
Subjects: 
European law
financial governance
sovereign privilege
sovereign safety
state-finance nexus
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Article

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