Common debt benefits both members when taxes fund risk sharing

Bonfanti models a common institution issuing safe-rate perpetual debt and distributing equal upfront grants, while national debt remains defaultable and unguaranteed.

It collects an income tax even during national default and rebates net revenue equally.

The impatient risky member values the grant more than future fees; the safe member gains insurance against imperfectly correlated incomes, not an expected subsidy.

For issuance worth 10 percent of annual GDP, a 0.09 percent tax eliminates common-budget deficits and their added default incentive.

Compensating the safe member requires 1.2 percent, roughly thirteen times more.

Both gain in 78 of 441 baseline policy cells, with programs reaching roughly 12.5 percent of GDP on a tax grid capped at 2 percent.

Larger issuance worsens national credit terms.

Joint public-good spending raises the safe member's maximum consumption-equivalent gain from 0.006 to 0.34 percent.

Both members gain in 399 of 441 cells on an extended tax grid reaching 5 percent; compensation precedes budget balance.

A 10 percent probability of reversed fiscal roles expands acceptable cells from 78 to 167 and maximum issuance from 12.5 to 22.5 percent of GDP.

A theoretical, unestimated liquidity extension shows small programs can face costs that block incremental expansion.

The paper reflects the author's views, not necessarily those of the ECB.