guarantee – is popular among economists25 but was firmly rejected by the european treaties, in my view for good reasons. reconciling these different expectations may require a degree of fiscal risk - sharing at euro area level. but there is a common point to both approaches to risk - sharing i have just outlined – the common fiscal capacity and the “ blue / red ” bond proposal. although their features are different, both need to be underpinned by a set of rules at euro area level, mutually agreed and enforced by common institutions. safe assets are only as safe as they are expected to be, and they are ultimately backed by legal and institutional commitments. as the minister of finance under the french restoration, baron louis, once famously said : “ if you give me good politics, i will give you good finances. ” only adherence to a common political project centred on the euro can secure such commitments in a sustainable manner. 26 and as long as this project is under strain, it is no wonder that the safety of assets will remain under question. 7 / 9 bis central bankers'speeches 1 david graeber has debunked the myth promoted by economists that money emerged from barter : in all societies money has emerged from debt and credit and barter occurs only accidentally. see graeber, d. ( 2011 ), debt : the first 5, 000 years, melville house publishing, chapter 2. 2 see hart, k. ( 1986 ), “ heads or tails? two sides of the coin ”, man, vol. 21, no 4, pp. 637 – 656. the “ cartalist ” approach to money which relates trust in the currency to the power of the issuing authority is a minority view among economists but has received broad support in other social sciences. see goodhart, c. ( 1998 ), “ the two concepts of money ”, european journal of political economy, vol. 14, pp. 407 – 432. for a discussion of the institutional underpinnings and the religious origins of money, see aglietta, a. and orlean, a. ( 2002 ), la monnaie entre violence et confiance, editions odile jacob. 3 see paik, p. y. and wiesner - hanks, m. ( eds. ) ( 2013 ), debt : ethics, the environment, and the economy ( 21st century studies ), indiana university press. 4 the correspondence between the financial and

too safe and too risky. too safe, because the widespread belief before the crisis that the debt of different euro area sovereigns was interchangeable fuelled an unwarranted spread compression and contributed to major financial and macroeconomic imbalances. and too risky, because the rapid unwinding of those beliefs cascaded through the financial system and government finances, pushing the euro area into a deeper and more prolonged crisis than other advanced economies. accordingly, there is a rift in europe between those economists and politicians who want public debt to be safe again, and those who want it to be riskier. but looking forward, neither extreme is sustainable. this is because we need public debt to be safe in the euro area. it is vital to the functioning of the financial system, analogous to the function of money in the real economy. and it allows governments to play their proper role in stabilising the economy, which is essential in the 1 / 9 bis central bankers'speeches institutional design of our monetary union. so if sovereign debt is too risky, it will place the full burden on other actors to provide safe assets for the financial sector and safe liabilities for governments. and because unsustainable fiscal policy can ultimately create pressure on the central bank to monetise debt, what is known by economists as " fiscal dominance ", even in a fiat money system impaired creditworthiness of governments ultimately creates the risk of an eroding trust in the ultimate safe asset : central bank money. yet at the same time, we also do not want public debt to be perceived as too safe, since that would eliminate the role of market discipline in delivering sustainable policies and create a false belief that governments cannot fail. 5 however strong our fiscal rules, our political systems cannot credibly deliver the promise that governments will never default on their debt – unless the central bank would commit to bailing them out no matter what, which the euro area by - laws have formally excluded6. what i would like to discuss today is how we might go about squaring the circle between risk and safety. risk and safety in the euro area what is the fundamental difference between “ safe ” and “ risky ” assets? it is ultimately about how they behave in financial crises. the prices of safe assets correlate negatively with risk aversion : in financial crises, demand for them soars, driving up their prices and pushing down their yields. this is because they contain no uncertainty about future payments, which means that