The level of public debt in the euro-area, generally considered excessive, represents the main hurdle on the way to wider risk-sharing among member states and deeper political integration in Europe. Understandably, fiscally sounder countries such as Germany would hesitate before assuming mutual responsibility with countries that have a heavy debt legacy or tradition of less fiscal discipline. However, for some weaker countries and, above all, for Greece, public debt is a fundamental issue because its debt level is so high as to be considered unsustainable. The peculiar architecture of a monetary union often makes risk-sharing happen through the backdoor, in an inefficient and non-transparent way, while at the same time jeopardizing the sustainability of national debts. In this short piece, we suggest a possible way to manage the problem without resorting to either full mutualization of fiscal policies or painful restructuring of national debts. The proposal has far-reaching consequences for the whole euro-area.

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