Fiscal consolidations, EU fiscal policy, Non-Keynesian effects of fiscal policy, E63, H30, H63,

The Maastricht Treaty is ten years old. Its fiscal rules played a key role in kickstarting and sustaining the budgetary retrenchment efforts in European Union countries in the run-up to economic and monetary union (EMU). The experience of the Maastricht-induced fiscal consolidation shows that the political economy dimension of the rules is key to their success. It remains to be seen whether the stability and growth pact -which aims to lock EMU members into a permanent fiscal discipline commitment while allowing for flexibility to cushion cyclical fluctuations -will work. In order to succeed in this undertaking, EU governments and institutions have to tackle a number of open issues in the implementation of the pact while recreating the political drive which made Maastricht a success.

This paper expands the growing literature on common safe assets in the context of the euro area financial system by employing credit risk simulation techniques to investigate the properties of different safe asset models and their impact on national bond markets. The paper explores in particular the E-bonds model, whereby a supranational institution would raise funds in the markets and provide bilateral senior loans to Member States corresponding to a fixed proportion of GDP, complementing the issuance of national government bonds, without risks of mutualisation. The main findings are that E-bonds could reach a volume of 15 to 30% of euro area GDP with a high degree of safety while becoming the reference safe asset for the banking sector, capital markets and monetary policy operations in the euro area. As regards the impact on remaining national bonds, such volumes would be consistent with Germany maintaining its top credit rating. The average funding costs of Member States would remain broadly stable, while marginal funding costs would tend to experience limited increases, which should enhance market discipline. * The opinions expressed in this paper are the authors' and do not necessarily correspond to those of their institutions of affiliation or the European Commission, to which they should not be attributed. The authors are grateful to Marco Buti and José Leandro for extensive discussions on, and encouragement for, our work on the concept of the European safe asset and possible constructions; to Dris Rachik for his statistical support; and to Sam Langfield,Álvaro Leandro and Jeromin Zettelmeyer for the close interactions and joint effort to advance on this topic, and for sharing the calculations underlying their respective work. We are also indebted, for useful discussions, comments and suggestions, without implying their endorsement, to our colleagues at the European Commission,

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