Working Paper - European Debt and Safe Assets: How to Build a Simple Framework
The most promising approach: gradually replacing national public debt with European bond issuance. A Working Paper by Marcello Messori
Executive Summary
To gain ‘strategic autonomy’ at the international level, to bring its production model closer to the technological frontier and to preserve its social model, the European Union (EU) must tackle radical challenges: making a substantial amount of innovative investments compatible with the planned ‘green’ transition, strengthening the defence industry by gradually building common protections against external aggression, and re-training human resources (including the active integration of migrants) using renewed education and social inclusion processes capable of addressing structural changes in the labour market.
These multiple challenges must be supported by a huge amount of public and private financing to be raised at the European level. It is therefore no coincidence that important members of the Eurosystem of central banks (see for instance: Panetta, 2025; Schnabel, 2025; Lane, 2025; Rehn, 2025) and scholars with rich institutional experience (Blanchard and Ubide, 2025) have recently relaunched the need to issue European bonds, already called for by Draghi (2024).
Together with Marco Buti, I have long insisted on the crucial importance of issuing European bonds to back a permanent Central Fiscal Capacity (CFC) capable of financing the production of European Public Goods (EPGs) (see Buti and Messori, 2022), thus also countering the fragmentation of the European financial markets and paving the way for the creation of a common safe asset. This would greatly facilitate the mobilization of household financial wealth to support innovative private investment. However, as Bini Smaghi (2025) recently pointed out, European funding of EPGs is insufficient to create a common, safe asset of international size and to unify EU financial markets in the short to medium term.
The literature on European bonds, which began at the peak of the sovereign debt crisis (2009-2012) in the euro area (EA) and was revitalized by the impact of the pandemic shock (2020-2021), has taken different paths to analyze these problems (see Section 2). In the current Working Paper, I am specifically interested in those contributions that address the creation of a permanent CFC not only in terms of flows (the issuance of European bonds to cover current imbalances) but also in terms of stocks (the management of public debts): as just recalled, a “stock-and-flow” approach is a necessary condition to link the issuance of European bonds to the construction of centralised financial markets (see Section 3). This suggests that the most promising approach is to look at simple ways to gradually replace stocks of national public bonds with issuances of European bonds. In the last sections (see Sections 4 and 5), I sketch one of these possibilities and specify the main difficulties for its implementation.
IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.
