Abstract
Common public debt in Europe is on the rise. Could it open a new chapter in fiscal integration? Over the past 15 years it has gained in prominence to provide collective funds for financial assistance and investment projects to meet common objectives, in particular when national budgets were stretched. This article reviews how the political focus of the Member States on keeping the financial position of the European Union (EU) under tight control has given way to large-scale common public debt issuance as the logical but still exceptional response to a crisis, pandemic, or war that demands collective action. To open a new chapter in fiscal integration, Member States will need to grant the EU a permanent option to borrow capital within pre-defined limits as well as a standing source of tax revenues for fulfilling its stabilisation, redistribution, and allocation functions. A central fiscal capacity with a permanent role for common public debt in turn requires effective central fiscal surveillance to secure sound national public finances.
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Notes
Member States or other parties may also make a voluntary contribution or offer a bilateral guarantee to secure the EU’s financial obligations.
Common public borrowing was and is also employed as a sectoral instrument. The High Authority of the European Coal and Steel Community (ECSC) had the power to borrow for granting loans related to the coal and steel sector. The European Commission borrows on a small scale on behalf of the European Atomic Energy Community (Euratom) to finance projects related to energy installations in both Member States and non-Member States.
Between 1978 and 1983, the EIB also managed the funds that the European Commission borrowed in the market under the New Community Instrument (or Ortoli facility) to support sectoral investments after an economic recession or the reconstruction of regions hit by an earthquake.
The ECB and the NCBs made the highest-rated public sector debt instruments in their monetary policy portfolio available for securities lending against cash collateral to reduce the general scarcity of safe assets in the market.
The ECB also used to demand a somewhat higher haircut when commercial banks pledged EU bonds as collateral in its money market operations. But in view of their improving liquidity profile, the ECB has brought the haircut it applies to EU bonds in line with that on euro area central government securities with effect from end-June 2023. See European Central Bank (2022).
See Grund & Steinbach (2023) for an analysis of the legal scope for a new one-off EU borrowing programme like NGEU or a permanent on-budget EU borrowing capacity.
A backing by direct national guarantees would create ever-rising national contingent liabilities.
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van Riet, A. The rise of common public debt in Europe: a new chapter in fiscal integration?. Econ Polit (2024). https://doi.org/10.1007/s40888-024-00326-1
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DOI: https://doi.org/10.1007/s40888-024-00326-1