Debt Union: Centralisation Through the Back Door?

As with all the beneficial political decisions taken by the European Union in recent years, it all began with a so-called "crisis": the NextGenerationEU recovery plan was celebrated in Brussels as a unique opportunity to emerge stronger from the pandemic, reshape the economy and society and create a Europe for all.[1]  The Covid-19 crisis turned into an economic crisis, which was to be countered with a 723 billion-euros economic recovery plan.

385 billion euros have been available to the member states since 2021 in the form of loans that must be repaid by the national governments. 338 billion euros, on the other hand, will be paid out in the form of grants, meaning that the repayment of the debt will be financed from the EU budget. Why is this all so tricky?

The Hamilton moment

In the slipstream of Covid-19, travel bans and supply chain problems, there was little discussion among the European public about the scope of this project. The population in the member states was also more preoccupied with lockdowns, entry bans, mask and testing requirements and, last but not least, vaccination. Announcements from national and Brussels politicians about billions in funding were the order of the day. And yet it was the first time that the EU had taken on debt together.

In an interview with Die Zeit in May 2020, Olaf Scholz, then Finance Minister under Chancellor Angela Merkel, spoke of the "greatest test" in the history of the European Union.[2]  France and Germany agreed on one point at the time: they were promoting a joint concept for a reconstruction of Europe - and calling for a fund worth several hundred million euros.[3]  In the interview, Scholz drew a comparison with the first Secretary of the Treasury of the United States, Alexander Hamilton. In 1790, shortly after the founding of America, he turned the debts of the individual states into federal debt.

The German economist Hans-Werner Sinn found mocking, albeit very clear words for the political exuberance in Brussels at the time:

The pathos is necessary to cover up the fact that the EU Commission is prohibited from credit financing its expenditure under Articles 310 and 311 of the Treaty on the Functioning of the European Union.[4]

Common debts are therefore not covered by the Union treaties - not even today. However, this has been deliberately ignored in Brussels, otherwise the NextGenerationEU program would not exist.

However, the deadline for loan applications expired in August 2023 and the disbursement of funds is due to be completed by 2026. Networks are therefore forming that are already campaigning for a successor program.

Not that the fund has been a huge success:
At the halfway point, the states have drawn down the funds provided much more slowly than planned. At around 225 billion euros, the European Commission has only paid out around a third. The effect on growth is also sobering: instead of an increase of 1.9 percent of gross domestic product (GDP) for 2022, the figure is 0.4 percent.[5]

However, the Commissioner for Economic Affairs, Paolo Gentiloni, does not believe that "the need for joint support for common goals and joint projects will end in 2026." Various think tanks are also warning that there will be a gap in public investment once the common debt policy expires.[6]

Should the joint debt policy be continued or not? At least at the moment, this question is being made into a sticking point between the political groups in the media: the Conservatives tend to say no, while the Social Democrats are more in favor. Well, it's an election campaign, so there's a lot of talk and promises.

It needs money, lots of money

Only recently, the European Union agreed on new common rules for budget deficits and national debt. A key innovation in the reform is the envisaged "differentiated approach to individual Member States to take account of the heterogeneity within the EU in terms of budgetary positions, debt levels and economic challenges." According to the Council, the new framework will allow for multi-annual country-specific budgetary target paths for each Member State while ensuring effective multilateral surveillance and respecting the principle of equal treatment.[7]

This makes the EU's financial policy dilemma perfectly clear: in order to implement all the projects that have been announced to the full (just to mention buzzwords such as aid for Ukraine, gas purchases or industrial subsidies to counter the USA's Inflation Reduction Act), a lot of money is needed.

The options for creating new joint sources of income are limited. For example, the use of parts of the revenue from EU emissions trading, most of which currently flows into national budgets, is being discussed. Or the withdrawal of funds from the newly introduced EU CO2 border tariff as well as additional payments from national budgets, for example on the basis of company profits.

However, if own resources are not increased (and it looks like they will be), debt repayments will have to be made from the EU budget. This means that the money will be lacking elsewhere, for example for the projects mentioned above. Unless, of course, new joint debts could be incurred...

However, anyone with even a basic knowledge of economics knows that government debt contributes significantly to inflation because it feeds excess demand. Other drivers of inflation are the high wage demands of the trade unions (some of which have already been implemented), the sanctioning of Russian energy sources and demographics with the wave of retirements that will soon set in.

One might therefore think that the EU and the member states should exercise the utmost caution and practise debt discipline. If not, indeed if not for this thought of the "Hamilton moment": born out of necessity, the continued joint borrowing could pave the way for the establishment of a European federal state? It could then be presented to the people in such a way that government investment, for example in infrastructure, could be financed jointly and on credit. The fact that this policy not only destroys the sovereignty of the states, but also the real value of the financial assets of all of us, doesn't need to be made a big deal of, does it?