Bank of Lithuania
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2021-05-24

Joint Debt Arrangements in EMU: From NextGenEU to Eurobonds

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EU’s landmark Next Generation EU programme is an important step forward in both European crisis response and, more generally, EMU deepening, given that the package features elements of both joint debt issuance and fiscal transfers. This paper analyses the programme in comparison to other most prominent joint EMU debt proposals and provides a comparative Scoreboard of the arrangements discussed. It concludes that Next Generation EU falls short of filling in key gaps in the current architecture of the EMU – in particular, the gap laid bare by the lack of a genuine European safe asset. A true “safe haven” instrument – a Eurobond with joint and several guarantees – could move the EMU into a closer alignment with the Optimum Currency Area (OCA) criteria and help compensate for the macroeconomic intra-euro area imbalances. The guarantee structure of the Eurobond, working as an insurance mechanism for Member States’ sovereign debt, would allow for joint debt to significantly strengthen the euro area’s macroeconomic and market stability, the financial sector, or the international role of the Euro. However, issuance of the Eurobond is associated with important moral hazard, political and legal risks, and would most of all require an unprecedented level of trust by Member States.

The views expressed are those of the authors and do not necessarily represent those of the Bank of Lithuania.

 

Economic and Monetary Union (EMU), Optimum Currency Area (OCA), joint debt, safe asset, fiscal union, Eurobonds, Blue and Red Bonds, Sovereign Bond-Backed Securities (SBBS), European Stability Mechanism (ESM), Next Generation EU, moral hazard, fiscal transfers, international role of the Euro