EU Public Debt Management and Eurobonds

A common Eurobond making each participating issuer liable only for its own share could be agreed upon by the Member States with the lowest credit risk premia: Finland, France and Germany. However, the efficiency gains from this weak form of cooperation in terms of market integration and liquidity would be limited if not offset by the higher costs of an inflexible debt management. To reap the liquidity benefits of a unified market, the Eurobonds should be issued by all euro-area Member States or by an EU Institution. But only a common bond jointly guaranteed by all euro-area Member States could reach the “safehaven” status and the size needed to compete with the US Treasury market. The mutualisation of credit risks faces however strong political opposition, because of fears of relaxed fiscal discipline and inequitable sharing of its benefits and costs. Although solutions to these problems can be found, more evidence is needed on the benefits and costs of a common Eurobond to convince potential issuers. This paper makes a first step in this direction.