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Europe, public debts, and safe assets: the scope for a European Debt Agency

Author

Listed:
  • Massimo Amato

    (Bocconi University)

  • Everardo Belloni

    (Politecnico di Milano SoM)

  • Paolo Falbo

    (University of Brescia)

  • Lucio Gobbi

    (University of Trento)

Abstract

The Covid-19 crisis has radically changed the game for world and EU-economies, and urged for a reappraisal of the guidelines for a healthy management of public expenditure. This requires a deep rethinking of the role of public debt in modern capitalistic economies and of efficient, equitable and politically viable ways of financing it. This paper outlines the main operating framework of a Debt Agency tasked with the management of the Eurozone sovereign debts and the creation of a truly European safe asset. The framework leverages on the potential irredeemable nature of sovereign debts in order to build a common bond. By structurally filtering liquidity risk, the Debt Agency can price the Member States’ funding costs by referring only to their credit risk, as defined by EU agreed rules. The common bond issued by the Debt Agency thus avoids mutualisation by design; hence, it can be directly bought by the ECB. Due to its structural intertemporal sustainability, the Debt Agency’s framework delineated in this paper can serve as a benchmark for institutional and political decisions. In this perspective, a counterfactual exercise has been conducted in order to evaluate the future potential impact of the Debt Agency as well as the past distortions in market pricing of Member States’ fundamental risk due to market mispricing of the liquidity risk.

Suggested Citation

  • Massimo Amato & Everardo Belloni & Paolo Falbo & Lucio Gobbi, 2021. "Europe, public debts, and safe assets: the scope for a European Debt Agency," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 38(3), pages 823-861, October.
    • Handle: RePEc:spr:epolit:v:38:y:2021:i:3:d:10.1007_s40888-021-00236-6
    DOI: 10.1007/s40888-021-00236-6
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    Cited by:

    1. Massimo Amato & Francesco Saraceno, 2022. "Squaring the circle: How to guarantee fiscal space and debt sustainability with a European Debt Agency," SciencePo Working papers Main hal-03554212, HAL.
    2. Francesco Saraceno, 2021. "The Return of Fiscal Policy: Eurozone Macroeconomic Governance after Covid," Annals of the Fondazione Luigi Einaudi. An Interdisciplinary Journal of Economics, History and Political Science, Fondazione Luigi Einaudi, Torino (Italy), vol. 55(2), pages 191-208, December.
    3. Massimo Amato & Everardo Belloni & Carlo A. Favero & Lucio Gobbi & Francesco Saraceno, 2024. "Stabilising market expectations through a market tool: a proposal for an enhanced TPI," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 41(2), pages 597-615, July.
    4. Stefano Deriu & Marcello Signorelli & Claudio Socci & Rosita Pretaroli & Francesca Severini & Ludovica Almonti, 2024. "The impact of shocks and policies on debt-to-GDP ratio dynamics: a multisectoral approach," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 41(2), pages 417-438, July.
    5. Massimo Amato & Francesco Saraceno, 2022. "Squaring the circle: How to guarantee fiscal space and debt sustainability with a European Debt Agency," Working Papers hal-03554212, HAL.

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    More about this item

    Keywords

    European Debt Agency; Safe asset; Eurobonds; Public debt; Perpetual loans;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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