Europe, public debts, and safe assets: the scope for a European Debt Agency
Massimo Amato (),
Paolo Falbo and
Lucio Gobbi ()
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Massimo Amato: Bocconi University
Everardo Belloni: Politecnico di Milano SoM
Paolo Falbo: University of Brescia
Economia Politica: Journal of Analytical and Institutional Economics, 2021, vol. 38, issue 3, No 3, 823-861
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.
Keywords: European Debt Agency; Safe asset; Eurobonds; Public debt; Perpetual loans (search for similar items in EconPapers)
JEL-codes: G2 G28 H63 H81 (search for similar items in EconPapers)
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