It’s only been four years, but it seems like an eternity. On June 15, 2021, the European Commission — for the first time — launched its €20 billion 10-year eurobond to raise funds. The symbolic value of this move was also enormous: it put an end to a debate that had been raging for years, surrounding joint debt issuance. Suddenly, the anti-eurobond attitude of then-German Chancellor Angela Merkel was gone. Also left behind was the word “No,” which had previously marked countless statements from Berlin, Vienna and The Hague… the same European capitals that, for years, repeated the damaging and misguided dogma of “expansionary austerity.” This oxymoron among oxymorons was refuted time and again by the facts.
In mid-2021, the Covid-19 pandemic was still raging. The risk of economic collapse was more than just a bad dream. Something had to be done. And the EU recovery funds — financed with those eurobonds — were, to the delight of many (and the chagrin of a few), the chosen way out of the quagmire.
Five years later, the reality is different. The Russian invasion of Ukraine, which began in 2022, has forced the EU to rearm and has generated enormous financing needs. The European economy is still struggling. And, even though the symptoms are somewhat better today than a couple of months ago, the stalwarts of the bloc — Germany and France — remain entrenched in sluggish economic growth. But the changing of the guard in the White House, trade setbacks aside, has opened up a range of opportunities that were difficult to imagine less than a year ago. This has resulted in fertile ground for eurobonds, which are now seen as an opportunity, rather than as a necessary pandemic-era emergency measure.
The golden opportunity is palpable — and audible — in Frankfurt and Brussels… although the opportunity originates thousands of miles to the west, at 1600 Pennsylvania Avenue, in Washington, D.C. The return of Donald Trump, with his anger, his erratic tariff policy and his rhetoric against the Federal Reserve, has badly shaken Wall Street. Investors have been quick to take note. The U.S. markets no longer look as attractive. And the promised land, surprisingly, now seems to lie in forgotten Europe. Older, yes, more boring, perhaps… but also much more reliable and predictable. Two attributes that, these days, are in short supply.
Some of the dollars that once flowed to Wall Street are now euros, which end up (and not in small quantities) in the companies that make up various European stock market indices, such as the German DAX, the French CAC, or the Spanish IBEX. And not only that: EU public debt markets have also jumped on the bandwagon, with a capital injection that the British bank Barclays estimates at almost €26 billion ($35 billion) in just a few months.
The central markets have rallied, but so have the peripheral markets: the Spanish risk premium is currently at its lowest level in 15 years, while Italy has gone from ostracism to financing itself at the same interest rate as its French neighbor. The EU, in short — for the first time in a long time — is holding all the financial cards. But it needs a final push to attract this huge volume of money, as investors get ready to pack their bags.
The proposal
The most solid proposal bears the signature of former chief analyst at the International Monetary Fund (IMF), Olivier Blanchard, and Spanish economist Ángel Ubide, the managing director and head of economic research for global fixed-income and macro at the hedge fund Citadel. In short, the plan involves issuing joint debt, with a maximum amount of 25% of GDP, so that each EU member can allocate these new funds to whatever it deems appropriate: defense, infrastructure, shoring up its social spending, or even reducing national debt. All of this, in theory, would involve a significantly lower interest rate than what each nation has to pay when it seeks financing alone. The eurobonds will be issued as they were in 2021, but on a far grander scale.
“The demand is there; international investors are asking for it. Just look at the recent inflow of money into European stock markets,” Ubide explains, during a phone call with EL PAÍS. “When you talk to the world’s major financiers — who are currently in the midst of rebalancing their portfolios — the question is clear: ‘Why aren’t there Eurobonds?’” The long-awaited strategic autonomy of the 27-nation bloc has two prerequisites: military power and financial power. “And, to have financial power, you absolutely must have a strong and liquid reserve asset to serve as an anchor: eurobonds. If we want Europe to be a leading geostrategic player, we need eurobonds. If we want the euro’s international role to be different [and] much greater… [again], we need Eurobonds.” The issuance of these bonds, he affirms, is “the only possible way” to create a truly European capital market.
“We’re facing an opportunity for the EU and the euro. We can’t let it pass us by. Either Europe does it now, or it won’t demonstrate the place it wants to – and can – occupy in the world,” Matilde Mas emphasizes by phone. She’s an emeritus professor at the University of Valencia (Spain) and director of international projects at the Valencian Institute of Economic Research (IVIE). “We have to take action: eurobonds aren’t technically difficult [to issue]; the instrument is already available and the market is hungry for safe havens.” Both the dollar and U.S. debt, Mas emphasizes, have had a “huge bargain” for decades. But that’s ending with Trump: his bombastic One Big Beautiful Bill Act — a law that cuts taxes for the rich, withdraws social assistance from the poor and boosts the deficit to levels not seen since the pandemic — leaves even more room to attract capital in Europe. “Right now, Germany is willing to go into debt again… and that’s huge.” All that remains, she says, is to overcome the EU’s reluctance and thus allow eurobonds to be given the green light again. Still, this won’t be easy.
Much of the resistance from wealthy Northern Europe — almost always led by Germany and the Netherlands — lies in the so-called “moral hazard.” There’s the fear that these high-income nations would end up paying for Southern Europe’s party… the waste “on drinks and women,” as the controversial and polemical Jeroen Dijsselbloem, former president of the Eurogroup, once uttered amidst the debt crisis, sparking all kinds of anger. This rhetorical flank, however, is weaker than ever today: just look at the eurozone’s economic growth chart, with the South leading the way. The trend began as something temporary, but it’s now on its way to becoming long-term.
“The opportunity to capture international [capital] flows is undeniable for Europe: the U.S. is losing reliability [by the day], while the potential for European growth [will be] evident as soon as a few key [steps take place], such as deregulation, decarbonization and the unification of the capital market,” outlines Leopoldo Torralba, a senior economist at Arcano Research.
“Washington’s latest moves have weakened the U.S. dollar and have called into question its role as a reserve currency. With [the issuing of] eurobonds, the euro would achieve greater global dominance,” Xavier Vives, from the IESE Business School, emphasizes along the same lines. “[The EU] needs a solid and very broad public debt market. It’s essential to put a large European safe asset into circulation.”
When asked if he’s optimistic about the issuance of eurobonds to raise capital, Vives replies: “I think so. Something will be done. The question, as always, is: ‘How far will [the EU] go?’”
Evidence of this golden opportunity — alluded to by the half-dozen sources consulted by EL PAÍS — is the huge inflow of money into European stock markets since Trump’s return to power, which has been marked by volatility. Also evident is the powerful accumulated appreciation of the euro against the dollar, which is experiencing its worst first-half of the year in half a century. Or the rise of the STOXX Europe 50, where the main EU companies are listed, which, against all odds, is rising much more cheerfully than Wall Street. And, of course, there’s the drop in the required yield on Treasury bonds, which have become significantly cheaper (especially in the Mediterranean region, with the exception of France). This is further proof of the changing appetite of those who previously invested in the U.S.: they’re now investing in the Old Continent.
Lagarde’s Suggestion
The renewed debate on eurobonds is far from a merely academic matter. Despite the lack of ambition in its new budget, the European Commission has just floated an interesting idea: an anti-crisis fund of almost €400 billion ($465 billion), fully financed by joint debt issuance. It has also permeated the very core of the European financial system.
Outside the bloc, more and more traders are wondering what the 27 EU member states are waiting for. “It is a ‘global euro’ moment. [We must] seize it and enhance the euro’s role in the international monetary system,” acknowledged the president of the European Central Bank (ECB), Christine Lagarde, in mid-June. The French technocrat didn’t explicitly mention this debt instrument, but there’s little doubt as to what she was referring to: “We must act decisively as a united Europe taking greater control of its own destiny.”
European Commission President Ursula von der Leyen speaks with European Central Bank President Christine Lagarde.JONAS ROOSENS (ANP / Alamy / Cordon Press)
One day after Lagarde wrote those lines in the always influential Financial Times, the ECB hosted a meeting of the working group for bond market analysis at its Frankfurt headquarters. Financial figures — including representatives from Vanguard, Union Investment and the Singapore sovereign wealth fund (GIC Private Limited) — marched in. The discussion centered on investors’ appetite for Europe as a natural alternative to Trump’s United States. The message was clear: times have changed. Potential capital flows to Europe could reach up to €800 billion (nearly $930 billion) in the coming years. “There’s unanimity regarding foreign investors’ growing interest in eurozone bonds,” read the minutes of that meeting, which, without naming them, directly referred to eurobonds: “The creation of a common, broad, deep and liquid safe asset would be more attractive to investors than the status quo.”
Even clearer, back in July, was the statement by the ECB’s chief economist, Irishman Philip Lane. “The [German bond market] is too small, both relative to the size of the euro area and the global financial system,” he told the institution’s elite, who had gathered at its governing council. He explicitly referred to the roadmap proposed by Blanchard and Ángel Ubide: “While this type of financial reform was originally proposed during the euro area sovereign debt crisis, the conditions today are far more favorable,”
There are, however, voices that soften this sentiment and temper the optimism. Despite seeing this debt instrument as “necessary to address all pending transitions, especially in energy and defense,” Carlos Martínez Mongay, former senior official at the European Commission’s Directorate-General for Economic and Financial Affairs, raises several “doubts.” Before ushering in eurobonds again, he emphasizes that it would be necessary to “change the fiscal rules” and “move forward” in three ways: by creating a truly federal tax system, while completing the banking and capital markets unions. “It’s going to be very difficult to overcome the reluctance of the [Northern European] countries and make this happen,” he ventures. “Voluntarism,” he warns, “almost never works in economics: the idea is good and the need is clear, but we have to be realistic and explain the risk distribution to convince the most reticent countries.” These nations include Belgium, Luxembourg, the Netherlands, and Germany.
“Eurobonds, in general, won’t be easy to achieve on a large scale; it’s unclear that this mechanism can be fully implemented,” adds Torralba, from Arcano Research. Germany, he argues, “would like a certain fiscal subordination from other countries… and it’s difficult [to foresee a scenario in which the Germans would accept a loss of sovereignty].”
It won’t be easy, but the path already seems to have been laid out. “The time is now. If not, when?” Ubide asks rhetorically. “If we don’t take this step — if we don’t meet the current demand for European assets — we’ll be making a huge mistake. We’ll be giving up on even cheaper financing, [when we could] dedicate that money to defense, research and development (R&D), or infrastructure. And, in a way, we’ll be choosing to make our economy less robust,” he warns.
Frugal no longer
Since 2010, in Southern Europe, the month of May has been plagued by bad memories. 15 years ago, Greece — which had just been rescued by the troika (the European Commission, the ECB and the IMF) — was the epicenter of a financial earthquake that spread unchecked south of the Alps and the Pyrenees. Back then, austerity was the sacrosanct program that was imposed by the financial institutions. In Germany, the Netherlands, Austria, and Finland, it was said that Southern Europe had to pay the price for the excess spending of the previous decade. This was an argument that came with a lot of moralizing… and little empirical evidence.
Time puts everyone in their place. And perspective, in the end, has ended up proving right those who thought — and said — that the financial crisis was simply caused by excess. That rigorism was the shortest route to economic disaster: a massive recession, several years of hardship, as well as an entire generation abandoned by the side of the road. That austerity, in the words of Xosé Carlos Arias, a professor of economic policy at the University of Vigo (Spain), was an unmitigated “mistake.” A decade-and-a-half later, he affirms, “every serious person understands that this was the case.”
Mario Draghi’s ECB had to correct course, with massive debt purchases that made it possible to avoid an abrupt end to the euro and alleviate — at least partially — the refusal of Germany and its allies to accept eurobonds. This veil would eventually fall years later, with the pandemic. Long ago, a former president of the European Commission, Jean-Claude Juncker, admitted the sin of “thoughtless austerity” and acknowledged that Greece had been “insulted.” And, he added, the IMF, which underestimated the impact of the cuts to the social safety net, went too far.
Rhetoric aside, however, it was the war in Ukraine, the first in Europe since the Balkans, that finally buried austerity. The new German government — a coalition of conservatives and social democrats led by Friedrich Merz — has scrapped the historic balanced budget amendment, in order to double military spending and thus confront the Russian threat. And it has announced a special fund of €500 million to cover infrastructure investments for a decade.
The most hardline of the hawks, former Dutch prime minister Mark Rutte, now NATO chief, had berated Southern Europe for years. But today, he has gone from staunchly defending cuts to calling for “significantly higher defense spending.” And, outside the eurozone, Denmark, where even the Social Democrats are frugal, has also made a radical shift in its positions.
“The Russian invasion of Ukraine and defense spending have been what brought down austerity… 1754834535 we’ll see if it’s definitively so,” Arias acknowledges, on the other end of the phone. “But, at the same time, a very dangerous trilemma is forming between defense spending, maintaining the welfare state, and the need to reduce debt. All three are important… and something will have to be sacrificed. But if there’s a way to provide an orderly and non-traumatic solution, it’s by issuing eurobonds.” If this step isn’t taken, he says, Europe will be sending a “terrible” signal to the rest of the world.
“Just because the austerity cure was a mistake — and [even if this is] acknowledged years later — doesn’t mean it can’t happen again,” the author warns. The champions of austerity, under the Russian threat, have seemingly changed their minds.
There are always those, however, who aren’t afraid to return to the past… however dark it may be. French Prime Minister François Bayrou has just announced a €44 billion budget cut, a reduction in public holidays by two days a year, as well as the elimination of thousands of public sector jobs. To make matters worse, his arguments are reminiscent of that sad spring of 2010. It’s as if nothing has been learned from the crippling austerity measures of the not-so-distant past.
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