Luxembourg's prime minister Jean-Claude Juncker and Italian finance minister Giulio Tremonti called for the issuance of joint European sovereign bonds - or "E-bonds" - to assert the "irreversibility of the euro".
The pair, in a column published in today's Financial Times, said the creation of a European Debt Agency that could issue such bonds would be possible as early as this month if the body that represents member states endorsed it.
"The European Council could move as early as this month to create such an agency, with a mandate gradually to reach an amount of outstanding paper equivalent to 40 per cent of the gross domestic product of the European Union and of each member state," they wrote.
By formulating a strong and systemic response to the euro zone debt crisis, Europe would send a clear message to global markets and European citizens of its political commitment to economic and monetary union, the writers said.
The market for such bonds could become the most important in Europe and reach a liquidity comparable to that of US Treasuries, they said.
However, the plan could meet resistance from countries such as Germany, who want to ensure governments are kept under pressure from bond markets, to avoid a repeat of the years of easy borrowing that led to Europe's debt crisis.
In a video interview published on the FT's website, German finance minister Wolfgang Schaeuble said jointly guaranteed bonds were not the solution because it would require "fundamental changes" in European treaties.
"I think without fundamental changes in the European framework, it's not possible," Mr Schaeuble said.
"As long as we have national competence for fiscal policy, we cannot give up the instrument for incentives and sanctions for the member states of Europe (to ensure) discipline in their national budget policies. Otherwise, the euro would fail."
But Mr Juncker and Mr Tremonti, who will be meeting Schaeuble and other euro zone peers in this evening's Eurogroup meeting, outlined two steps for the scheme to work.
"First, the EDA should finance up to 50 per cent of issuances by EU members, to create a deep and liquid market."
"In exceptional circumstances, for member states whose access to debts markets is impaired, up to 100 per cent could be financed in this way."
The second step would be the possibility to "switch" between E-bonds and existing national bonds, they said.
"The conversion rate would be at par but the switch would be made through a discount option, where the discount is likely to be higher the more a bond is undergoing market stress."
Knowing in advance the evolution of such spreads, member countries would have a strong incentive to reduce their deficits, the two policymakers said.
A sovereign debt crisis has forced the euro zone to bail out two members, Greece and Ireland, this year and EU leaders are trying to prevent it from spreading to other economies such as Portugal, Spain and Italy.
Germany has rejected calls by Spain to create a "fiscal union" in the euro zone to ease market concerns about the imbalances in the region.
If the German parliament were asked today to give up national budgetary authority, Mr Schaeuble said "you would not get a 'yes' vote".
But "if you give us some months to work on this, and if you give us the hope that other member states will agree as well, I would see a chance", he told the FT, adding it would be easier for Germany to cede sovereignty because of its post-war history.
"It is more difficult for other countries."
Reuters