In December 2025, Belgium successfully blocked an EU initiative, led by Germany, to seize more than €200 billion of Russian assets held in Belgium to fund the Ukrainian war effort. Instead, the EU decided to borrow €90 billion by issuing joint EU debt, without the unanimous consent of all Member States (a first). Was it a good idea? We don’t think so.
Hidden Motives
Belgium was worried about risks to €19 billion in European assets held in Russia, which a small contingent guarantee would have covered.
Instead, the EU embarked in a risky adventure. It 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, e.g. by using a share of the confiscated Russian assets
The answer is that France and Italy did the math, but didn’t let a crisis go to waste. They spotted an opportunity to force Germany to accept more joint debt issuance in the future.. 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.
France, Italy and the Bond Vigilantes
A number of European governments, including Italy and France, have used up most of their fiscal capacity, with generous promises to older citizens that are hard to keep.
In France, the current government narrowly passed a budget 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 through joint EU debt.
Instead of reneging on these promises, 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 also increase.
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.
Would You Share a Credit Card With Your College Roommates?
The EU and the Eurozone were never designed to be a fiscal union.
The EU treaties avoided centralizing fiscal powers in Brussels. The EU is a club of fiscally sovereign countries: 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. 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 have been provisions to this effect since 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.
What A Fiscal Union Means
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 agreement at the EU level are dim.
There are currently no democratic processes for resolving disagreements on fiscal matters within the EU. 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.
The Draghi report argued that the EU should issue joint debt to fund spending on EU public goods, energy, defense, etc. But joint debt 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.
Belgium did not score a victory for small countries. Instead 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.