2026 Theses Doctoral

Essays in European Integration

Bonfanti, Giovanni

This dissertation examines the complexities of European fiscal and financial integration in a setting of imperfect markets and fragmented politics. The issuance of common debt as a joint liability of the members of the European Union (EU) is studied under both a positive and normative perspective. The dissertation analyzes the constraints holding back the process of integration due to frictions in financial markets and emphasizes the need for coordination across different agents. It describes the large and underappreciated role of varying expectations about support from the central bank in magnifying the existing market segmentation. It tackles the issue of welfare implications for heterogeneous countries and describes a path toward mutually beneficial fiscal reform.

In the first chapter, joint with Juri Marcucci, we study bonds issued by the EU as joint liabilities and show that they pay higher interest rates than comparably safe sovereign issuers. The spread reflects their greater sensitivity to adverse market shocks, which is particularly pronounced during periods of monetary tightening. Using novel data, we document that EU bonds have a small investor base because they are excluded from major fixed-income indices due to their lack of formal sovereign status. This exclusion lowers expected prices during crises, making EU bonds unattractive to investors with liquidity needs, such as mutual funds and foreign central banks. Banks and insurance corporations in core countries replace expensive safe government bonds with cheap but illiquid EU bonds. A demand-based asset pricing framework suggests that the spread would be negligible if the EU were recognized as a fully sovereign issuer, and this would not come at a high cost for existing safe asset issuers due to strong foreign demand.

In the second chapter, I study the effect of time-varying expectations about the willingness of the central bank to intervene in distressed markets on relative asset prices. I document that market perceptions about asset purchases drive large variations in the spread between securities with the same fundamentals but different liquidity properties due to market segmentation. In particular, issuers with a lower pool of potential investors see their borrowing costs spike when the central bank is perceived as unwilling to provide market support due to high inflation. This mechanism is shown in the context of the mandate of the European Central Bank (ECB), which is bound to act symmetrically across issuers, regardless of their exposure to external shocks. EU bonds are thus particularly exposed to depreciation during periods of high inflation due to their stronger reliance on the ECB for liquidity provision during crises.

In the third chapter, I challenge the conventional wisdom of fiscal integration in a currency union as a transfer from fiscally strong to fiscally weak member states. I show that this trade-off changes when combining common debt issuance with partial common taxation that members cannot default on. I characterise a fiscal threshold for the taxation parameter above which fiscal integration eliminates the incentive for the risky country to default, and I derive analytical welfare decompositions for each country. The risky country gains through the unrestricted upfront transfer and an equilibrium commitment channel that improves its private-market borrowing cost; the safe country gains through reduced spillovers from default. They both benefit from an implicit risk-sharing instrument and a calibration suggests that a Pareto improvement can be achieved with a very modest amount of common taxation. Extensions to a convenience yield on the common bond, common public goods, and reversals in the status of countries enlarge the region of Pareto improvements.