IMF experts propose to merge eurozone debts

Experts from the International Monetary Fund have proposed centralizing part of the public debt of the eurozone countries, according to the report Debt Mutualization in the Euro Frea: A Quantitative Exploration. According to the authors of the document, this will require the creation of a special supranational structure – the European Debt Management Agency (EDMA).

According to the concept described in the report, the agency will issue risk-free bonds in the amount of approximately 15% of eurozone GDP and will actually buy out part of the obligations of European countries. First of all, the operation to replace sovereign debt with a pan-European one will affect countries that have exceeded the borrowing limits set by budgetary rules. Under the Maastricht Treaty (or European Union treaty), countries were required to meet a commitment threshold of 60% of GDP. According to the results of 2022, the eurozone public debt amounted to almost 100% of total GDP.

In response to the coronavirus crisis, both developed and developing European countries launched large-scale fiscal stimulus programs, which led to the growth of public debt to historical highs, the document states. While debt-to-GDP has increased across the board, the rise in the burden has been asymmetrical, with some countries under more pressure than others, IMF experts write.

The creation of the European Agency would significantly reduce the debt, but such a step is associated with significant “moral hazard”, in fact, reputational costs for the European authorities, the authors of the report believe. “This is one of the key conditions for the effective implementation of such an idea,” they emphasize. Moral hazard could be reduced by concentrating EDMA resources on buying back debt accumulated as a result of an exogenous shock common to Europe: a crisis from a pandemic is best suited for this role. Thus, it would be possible to carefully limit the mutual assistance of the eurozone countries through the relief of risks arising from an extreme, uncontrollable situation, the IMF believes.