Squaring the Circle: How to Guarantee Fiscal Space and Debt Sustainability with a European Debt Agency

25 Pages Posted: 17 Jan 2022 Last revised: 3 Feb 2022

See all articles by Massimo Amato

Massimo Amato

Bocconi University - Department of Policy Analysis and Public Management

Francesco Saraceno

Observatoire Francais des Conjonctures Economiques, Paris (OFCE)

Date Written: January 17, 2022

Abstract

The paper contributes to the debate on European macroeconomic governance. What is at stake is creating fiscal space for eurozone countries, while ensuring the sustainability of large public debts. Whether fiscal space is created through fiscal rules' reform, the creation of a central fiscal capacity, or a mix of the two, the question of public debt management, past and future, is paramount. Here we discuss a proposal that aims at systematic debt management through an ad hoc European Debt Agency. This EDA would progressively absorb Member States' debt, while keeping them accountable through pricing based on fundamental risk. We further show that (1) a Debt Agency could be designed so as not to imply debt mutualization or moral hazard and that (2) common debt management would allow the ECB to normalize monetary policy without creating instability in sovereign debt markets. An important argument of the paper is that any proposal that does not deal with the entirety of debt risks decreasing sustainability thus being counterproductive.

Keywords: European Debt Agency; Fiscal Space; EMU Fiscal Governance; Growth and Stability Pact; Fiscal Rules; Risk Sharing; Public Debt; Debt Management

Suggested Citation

Amato, Massimo and Saraceno, Francesco, Squaring the Circle: How to Guarantee Fiscal Space and Debt Sustainability with a European Debt Agency (January 17, 2022). BAFFI CAREFIN Centre Research Paper No. 2022-172, Available at SSRN: https://ssrn.com/abstract=4011081 or http://dx.doi.org/10.2139/ssrn.4011081

Massimo Amato (Contact Author)

Bocconi University - Department of Policy Analysis and Public Management ( email )

Via Roentgen 1
Milan, 20136
Italy

Francesco Saraceno

Observatoire Francais des Conjonctures Economiques, Paris (OFCE) ( email )

69 Quai d'Orsay
75007 Paris
France

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