What Prospects for a European Debt Agency ?

The Greek and Irish crises have highlighted one of the shortcomings of Economic and Monetary Union, namely that there is no mechanism for preventing and dealing with public debt crises in the euro area (ea). In this context, we analyse the possibility of joint issuance of debt securities by euro area governments managed by a European Debt Agency (eda). The eda could fulfil three main objectives : 1) enhancement of the budgetary coordination within the ea ; 2) reinforcement of the ea financial stability ; and 3) financing of ea member states at optimal costs, the traditional mandate of a national debt agency. Our proposal favours the first objective by implementing effective means of supervising and coordinating fiscal policies. Moreover, this eda, being de facto a crisis support mechanism, improves also the ea financial stability. Furthermore, it would increase the liquidity of the securities issued pushing down participating countries financial costs. From a practical perspective, we analyse the model for an agency that would issue euro-bonds and re-lend to participating countries. It would have a decision making body, or Board, that would set the quantities to be issued and/or the prices to be paid as a function of the fundamentals of the participating countries. The agency would be independently governed, thus making it possible to raise prices, reduce amounts and even deny access to financing for the least virtuous countries.