Europe’s Folly

Issuing joint debt without a broader fiscal plan is a bad idea and will undermine further EU integration

In December 2025, Belgium successfully blocked an EU initiative, led by Germany, to seize more than €200 billion of Russian assets held in Belgium in order to fund the Ukrainian war effort. Instead, in a midnight session on December 18, the EU decided to tap capital markets and borrow €90 billion by issuing joint EU debt. The issuance of joint debt, without the unanimous consent of all member states, was unprecedented. Was it a good idea? We don’t think so.

In blocking the seizure of Russian assets, Belgium was worried about risks to €19 billion in European assets held in Russia, which a small contingent guarantee would have covered at a modest cost. Instead, the EU embarked in a risky adventure of joint debt issuance. The EU can now issue more joint debt against the common EU budget without obtaining approval from all member countries. The initiative is dangerous because the issuance of joint debt could further undermine the legitimacy of European institutions.

Why would Italy and France lend their support to joint issuance? It would have been much cheaper to offer Belgium guarantees against any Russian claims. A share of the confiscated Russian assets could have been used for this purpose. Didn’t they do the math? The answer is that France and Italy didn’t let a crisis go to waste. They spotted an opportunity in the Ukraine impasse to force Germany to accept more joint debt issuance in the future. They did the math, but it’s not the math that the situation called for. As a result, the EU has moved one step closer to a hastily improvised and half-baked fiscal union without proper guardrails and democratic checks.

A number of national EU governments, including Italy and France, have used up most of their fiscal capacity. These governments have made generous promises to older citizens that are hard to keep. In September of 2025, just a few months ago, the Bayrou government fell as a result of its inability to move a budget through the French legislature. The government that replaced it obtained a budget reprieve by suspending a hard fought reform of the public pension system. The French retirement age is now back to 62 years, compared to 67 in Germany. The proper way to generate more fiscal space is to reform entitlements, not to shift the burden to those who have better policies.

Instead of reneging on these promises to older generations, who show up at the polls, many EU governments have issued massive debt to shift the burden of current spending to the young and future generations, who don’t vote. This shift happens through borrowing, but that can get expensive if bond yields rise as a result. When these countries significantly increase borrowing, the yields on the national bonds issued by their governments also increase, as the recent example of France illustrates.

Countries like France and Italy are desperately looking for ways to mitigate the discipline imposed on their budget by the bond market. Joint debt issuance allows them to do just that. Since the ECB started shrinking its balance sheet in 2022, French bond yields have become more sensitive to local fiscal news, unnerving policy makers in Paris. The bond market had moved France from the core to the periphery. Joint debt issuance, instead, can offer them the promise of lower yields, by shifting the burden to the taxpayers of other countries with more disciplined fiscal policies [1].

Belgium sold the joint debt deal as a victory for the rule-based international order. Not quite. The EU and the Eurozone were never designed to be a fiscal union. All of the EU treaties avoided centralizing fiscal powers in Brussels. The EU is a club of fiscally sovereign countries. The Eurozone’s founding fathers understood that fiscal sovereignty does not mix with fiscal federalism.

Fiscally sovereign governments don’t issue debt jointly, even when they spend on public goods like defense, for the same reason college roommates don’t get a joint credit card to fund their joint spending. When you’re running up your own credit card balance, you worry about the impact of your spending on your credit score and your interest rate. When you’re borrowing with others on the same credit card, you worry much less. This is not a workable arrangement unless the roommates can impose limits on each other’s overall spending and borrowing. The EU and the Eurozone have failed to impose binding constraints on spending and borrowing by member states, even though there were provisions to this effect in the Maastricht Treaty. Occasional exceptions have become the norm for many countries, including large ones like France. The lesson is this: there can’t be joint debt issuance without a full fiscal union. And there cannot be, in the current political environment, a full fiscal union in Europe.

Under a fiscal union, EU institutions would have the power to tax and spend with the consent of the people. But Europeans have radically different preferences over government spending and taxes, and the prospects for them agreeing on tax and spend policies at the EU level are dim. There are currently no democratic processes for resolving disagreements on fiscal matters within the EU.[2] In this context, putting the horse before the cart - joint issuance ahead of a fiscal union - could put more wind in the sails of the populist backlash in core countries. A fiscal union entails fiscal transfers from the core to the periphery, as we are starting to see happen, which will generate resentment from the payers, and might ultimately undermine the whole European project.

In a recent influential report on EU competitiveness, Mario Draghi argued that the EU should issue joint debt to fund spending on EU public goods, energy, defense, etc. [3] That sounds quite plausible until you remember that cash is fungible. Joint debt issuance does not create any additional fiscal capacity for the EU as a whole. It merely reallocates fiscal capacity from the core to the periphery by allowing the latter to borrow more at lower rates. It benefits highly indebted periphery countries at the cost of the fiscally responsible core.

German bonds currently trade at a premium relative to other Eurozone bonds even after adjusting for differences in default risk. These bonds earn a convenience yield because they’re viewed as safe and liquid. That’s a substantial source of additional revenue for the German Treasury. If other Eurozone countries similarly want their bonds to trade at a premium, the best approach would be to stop running huge government deficits instead of resorting to joint debt issuance.[4]

So, Belgium did not score a victory for small countries. Instead, perhaps unwittingly, it helped large countries like France and Italy score a victory for their retirees, who have been promised generous pensions and cheap healthcare. The EU is likely to see more overall debt issuance in the future, including joint EU debt, shifting the burden of the generous pensions and health spending for retirees to future generations, and from the EU periphery to the core.

References

1. Chien Y, Jiang Z, Leombroni M, Lustig HN. What does it take? Quantifying cross-country transfers in the eurozone. Social Science Research Network. 2025. doi:10.2139/ssrn.5519158

2. Alesina, Alberto and Romain Wacziarg (1999), “Is Europe Going Too Far?”, Carnegie-Rochester Conference Series on Public Policy.

3. Draghi M. The Draghi report. In: European Commission [Internet]. Sep 2025 [cited 4 Jan 2026]. Available: https://commission.europa.eu/topics/competitiveness/draghi-report_en

4. Jiang Z, Lustig H, Van Nieuwerburgh S, Xiaolan M. Bond convenience yields in the eurozone currency union. Cambridge, MA: National Bureau of Economic Research; 2025 Oct. Report No.: w34307. doi:10.3386/w34307