Eurobonds: A New Approach to Financial Stability in the Eurozone?

Recent research published in NBER Working Papers proposes an innovative approach for financial stability within the Eurozone. Currently, member countries face dual pressures from policies that intertwine short-term economic stabilization with long-term fiscal sustainability. This combination can create significant deflationary and inflationary risks, particularly during severe recessions or fiscal stagflations. To address these challenges, the authors propose a new model where a centralized treasury would issue Eurobonds to finance countercyclical stabilization measures, while national governments retain responsibility for long-term fiscal sustainability. Such an arrangement would enable more effective coordination between the treasury and central bank in case of major recessions without necessarily relaxing national fiscal rules. Implementing this model could eliminate extreme risks of deflation and fiscal stagflation, transforming it into an automatic stabilizer mechanism. This proposal represents a groundbreaking approach to balancing short- and long-term market demands within the Eurozone.