Written by Angelos Delivorias and Carla Stamegna,
The idea of issuing joint debt instruments, in particular between euro-area countries, is far from new. It has long been linked in various ways to the Union’s financial integration process and in particular to the implementation of economic and monetary union. In the first decade of the euro, the rationale for creating joint bonds was to reduce market fragmentation and thus obtain efficiency gains. Following the financial and sovereign debt crises, further reasons included managing the crises and preventing future sovereign debt crises, reinforcing financial stability in the euro area, facilitating transmission of monetary policy, breaking the sovereign-bank nexus and enhancing the international role of the euro.
While joint debt instruments present considerable potential advantages, they also present challenges. These include coordination issues and reduced flexibility for Member States in issuing debt, the potential to undermine fiscal discipline by removing incentives for sound budgetary policies, and the fact that adoption of joint debt instruments would eventually entail the difficult political choice of transferring sovereignty from the national to the EU level.
In the context of the current crisis caused by the COVID-19 pandemic, joint debt instruments have once more come to the fore as a potential medium-term solution to help Member States rebuild their economies following the crisis. In Eurogroup and European Council meetings, the solution is not favoured by all Member States and alternative – possibly complementary – approaches have been proposed, such as a credit line through the European Stability Mechanism.
Read the complete briefing on ‘Joint debt instruments: A recurrent proposal to strengthen economic and monetary union‘ in the Think Tank pages of the European Parliament.