A sober look at the case for common European Union debt

Proposals for common European Union debt have resurfaced, driven by two distinct rationales: financing specific European public goods, and expanding the share of EU debt to deliver broader macroeconomic benefits. This paper focuses on the second rationale, examining whether current and proposed institutional arrangements can deliver the benefits their proponents claim. 

We find that the full set of these benefits, which include lower public borrowing costs, improved financial stability and deeper capital market integration, would only materialise under a fiscal union, in which the EU’s fiscal powers are comparable to those of a federal government. Additional temporary common debt issuance for specific purposes within the existing framework would likely fail to deliver most of the benefits. The main reason is that the current investor base for EU debt remains much narrower than that for sovereign debt. This is unlikely to change merely by issuing more debt. A proposal by Blanchard and Ubide (2025) to swap a portion of national debt into EU debt could address this, as it implies a commitment to a sizeable, permanent EU debt stock. At the same time, we argue that EU debt issued under their proposal is unlikely be AAA rated. 

Our analysis leads to two main policy recommendations. First, the EU should commit to either permanently roll over the main source of current debt – the NextGenerationEU pandemic-recovery programme – or maintain a minimum level of EU debt outstanding. Second, the EU should take a modest step towards a fiscal union by delegating to the European Commission emergency fiscal powers, including pre-identified revenue measures, that would be activated in the unlikely event that EU debt service falls short. This would strengthen the claim that EU debt is sovereign-like. It would also bolster the prospect that EU debt issued under the Blanchard-Ubide or similar proposals would receive an AAA rating.

Conversations with or comments from Jakob Adolfsen, Agnes Bénassy-Quéré, Lorenzo Bini-Smaghi, Andreas Billmeier, Olivier Blanchard, Giovanni Bonfanti, Marco Buti, Rebecca Christie, Zsolt Darvas, Mar Domenech Palacios, Hans Geeroms, Gene Frieda, Maximilian Fuchs, Gergely Hudecz, Sam Langfield, Silvia Merler, Erik Nielsen, Will Oswald, Lucio Pench, Mahmood Pradhan, Siegfried Ruhl, Isabel Schnabel, Ángel Ubide, Shahin Vallée, Nicolas Véron, Guntram Wolff, Stavros Zenios and seminar participants at Bruegel and the European Systemic Risk Board (ESRB) are gratefully acknowledged. The opinions expressed in this paper reflect those of the authors and not necessarily those of the institutions they are affiliated with.