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Outline of a redistribution-free debt redemption fund for the euro area

The paper analyses the creation of a European Redemption Fund, which mutualizes a sizeable fraction of euro-area countries' national public debts. The authors discuss the potential benefits in terms of lower systemic risks in the Euro area and outline what the Fund should be like in order to avoid cross-country transfers and ensure a relevant debt reduction in the medium term. The paper argues that, if each country transfers a sizeable share of debt to the fund, financial stability of the euro area could be enhanced. At the same time, a yearly contribution linked to the amount of transferred debt and national GDP could be designed in such a way to ensure a relevant lowering of the debt over the medium term with no ex-ante cross-country redistribution. Incentives to fiscal discipline at the margin would not be weakened.