Europe’s Folly: Is Joint EU Debt a Good Idea?

Hello! Today is March 2, 2026, and here is your EU news summary for the week. Feel free to share this newsletter with friends and colleagues, and follow us on LinkedIn.

This week’s briefing is brought to you by Hanno Lustig and Romain Wacziarg. It is an edited version of “Europe’s Folly”, which appeared in their excellent newsletter The Two Cents.

Romain is a professor of economics at UCLA and the managing editor of the Journal of the European Economic Association (JEEA). Hanno is a professor of finance at Stanford Graduate School of Business and a research associate at the National Bureau of Economic Research (NBER).

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.

MERCOSUR • Following the vote of the Council of the EU in January, the Commission has decided to provisionally apply the trade pillar of the EU‑Mercosur agreement (the Interim Trade Agreement), despite the European Parliament having referred the deal whole deal (the Interim Trade Agreement and the EU-Mercosur partnership agreement) to the Court of Justice of the EU (CJEU).

Legally the agreement is treated as falling largely under exclusive EU competence, allowing the Council of the EU to authorise signature and provisional application by qualified majority without national ratifications.

Provisional application “is a Council (representing EU Member States) act (...) leaving the Commission (in charge of enforcing EU trade agreements) with little to no margin of appreciation as to whether to proceed with this procedure”, researcher Alexandre Lejeune noted in a blog post

Politically, the move has triggered sharp criticism from France, farm lobbies and civil society groups, who argue that implementing the deal before Parliament’s vote constitutes an “unacceptable denial of democracy” and breaks post‑Lisbon practice that Parliament must first give consent for major mixed trade agreements.

Supporters, including von der Leyen and trade‑friendly groups in Parliament, frame provisional application as a necessary response to intense global competition for Mercosur markets and as a way to avoid further delay while the Court reviews the agreement.

As Ursula von der Leyen noted on February 27, “‘Provisional application’ is, by its nature – provisional. It is right there in the name. In line with the EU Treaties, the Agreement can only be fully concluded once the European Parliament has given its consent.”

If the European Parliament ultimately refuses consent to the trade agreement, the EU is expected to pull the plug. The Council would need to terminate the agreement and repeal its decision on signature and provisional application.

COMPETITION • With Member States debating “made in Europe” rules and subsidies under the proposed European Competitiveness Fund before the upcoming European Council summit in March, merger control policy is attracting less spotlight.

In 2025, the Commission launched a review of its main merger control guidelines, with a draft expected in spring 2026 and likely adoption by 2027. On February 25, Czechia, Estonia, Finland, Ireland, Romania, and Slovenia called for “robust and effective” rules as well as “effective enforcement”. The non-paper warned that “relaxed Competition Policy is not the answer to unfair competition from third countries”. It also rebukes a long-standing request for Europe-wide consolidation by telecom operators: “the empirical link between higher concentration and stronger investment incentives in telecom markets is at best inconclusive”.

MERZ • Friedrich Merz is using a tightly coordinated trade diplomacy tour to cast Germany as the EU’s de facto lead interlocutor with both Washington and Beijing.

In Washington this week, he plans to press President Donald Trump for legal and political clarity on the new US tariff regime and its compatibility with the EU‑US trade deal, arguing that companies need predictability.

In Beijing last week, Merz called for a “balanced, reliable, regulated and fair” economic partnership, urging Xi Jinping to address overcapacity, rein in subsidies and allow currency appreciation.

• For Bloomberg, Ben Sills argues that if EU leaders fail to make the difficult collective decisions that Mario Draghi considers necessary to avoid a “slow agony,” the EU could gradually begin to unravel. The Union is threatened by an aggressive and unstable U.S. policy, by a nationalist unravelling of Schengen and the single market, and by a gradual loss of geopolitical relevance as vetoes and inaction undermine its ability to act.
• In a column for the ECIPE, Matthias Bauer argues that instead of treating human rights rules as unreasonably burdensome red tape, the European Union should focus on the elephant in the room: the enormous costs of Single Market fragmentation.