The Preferential Treatment of Government Debt in European Financial Law: A Composite Index for 2008-2020

After the great financial crisis of 2008 the European regulatory authorities set out to tighten financial law with the objective to strengthen the resilience of financial institutions and secure financial stability. As it turns out, the overhaul of EU financial legislation also enhanced the existing preferential treatment of public relative to private issuers of debt securities, especially for the euro area countries. This paper constructs new composite indices that aggregate the main government funding privileges introduced in EU financial law over the period 2008-2020. Their growing reach until 2020 shows that the earlier trend of EU countries reducing the scope of their political interventions in the national financial system was replaced by a European equivalent, going in the opposite direction. On the one hand, these legal privileges facilitated public debt management during the sovereign debt crisis and the large issuance of sovereign bonds to address the impact from Covid-19. On the other hand, they undermine market-based fiscal discipline and complicate EU fiscal policy surveillance. Moreover, larger financial sector holdings of national public debt could crowd out private sector borrowing and pose risks to financial stability in times of fiscal stress in the euro area.