The Temporary EU Policy Framework on Debt until the Big Bang in 2030

Germany has conditioned its support for harmonizing the debt calendars in the eurozone around Italian, French, and German benchmarks, administered by a debt management office in the ECB, on reducing the debt pile in the Member States. Berlin has not publicly stated the purpose of tying its hands, although Lindner has signaled progress on shared goals in EU is contingent on the EU getting its act together. We now have a Franco-German agreement that the foundation of the EU must become more solid for the EU to enlarge, and that the harmonization of debt calendars flanked by an EU-tax serving a variety of public policy purposes form part of that. It is uncontroversial, this common understanding clinched the deal between Paris and Berlin to move forward on EU Treaty reforms in two steps: the IGC25 via the simple 20method13, and in 2030, more likely than not based on a convention.

Subsequently, a few craven commissioners demanded more money for the executive in the making without considering how to accommodate German desires and addressing the need for a balanced solution at various levels. Lurking beneath all this is a political conflict around to which degree Germany is entitled to cash in Europe continuously – Germany will both pay the most and benefit the most from a harmonization of det issuance calendars – or whether a more stable Treaty framework enshrining the desired political order in Europe should be identified, as the EU moves from wealth to power.

Harmonisation of the debt issuance calendars in the eurozone means that the member states would coordinate their timing and frequency of issuing sovereign bonds, as well as the maturity and size of their debt instruments. This could potentially reduce the fragmentation and volatility of the euro area bond market, increase the liquidity and transparency of the debt securities, and lower the borrowing costs for the member states
Germany has been a strong advocate of fiscal discipline and debt reduction in the eurozone, especially after the sovereign debt crisis that affected several countries in the periphery. Germany has also been one of the primary beneficiaries of the low interest rates and the haven status of its bonds, which have allowed it to finance its public spending at very favorable conditions
Germany’s support for harmonizing the debt issuance calendars is conditional on the other member states, especially Italy and France, reducing their debt levels and complying with the fiscal rules of the EU. Germany argues that this is necessary to ensure the stability and credibility of the euro area and to avoid moral hazard and free-riding by the high-debt countries.
The idea of linking the harmonization of the debt issuance calendars to the debt reduction of the member states is inspired by the 2007 article by Professor Cohen, who argued in RIPE that the enlargement of the EU and the eurozone would pose a challenge to the international role of the euro, as the new members would have different interests and priorities, and would dilute the coherence and effectiveness of the monetary union. Cohen suggested that the eurozone should adopt a common debt management strategy, based on a set of benchmarks and incentives, to enhance the attractiveness and competitiveness of the euro as a global currency.
The feasibility of grafting this idea onto the German state strategy depends on several factors, such as the political will and consensus among the member states, the legal and institutional framework of the EU and the eurozone, the economic and financial situation of the member states, and the external shocks and pressures that may affect the euro area.

Some possible challenges and obstacles are:

The lack of trust and solidarity among the member states, especially between the core and the periphery, may hinder the cooperation and coordination on debt issuance and management.
The resistance and opposition from some member states, especially Italy and France, may perceive the German conditionality as an infringement on their fiscal sovereignty and a threat to their growth and welfare objectives.
The legal and institutional constraints that may limit the scope and flexibility of the harmonization of the debt issuance calendars, such as the no-bailout clause, the prohibition of monetary financing, and the subsidiarity principle
The economic and financial uncertainties and risks may affect some member states’ debt sustainability and market access, such as the impact of the COVID-19 pandemic, the geopolitical tensions with Russia and China, and the potential spillovers from the US fiscal and monetary policies.
The benchmarks that may be used for the strategy development within the domain in sectoral terms could include the following indicators:
- The debt-to-GDP ratio measures the overall level of public debt relative to the size of the economy. The EU fiscal rules set a reference value of 60% for this indicator and require the member states to reduce their excess debt at an average rate of one-twentieth per year
- The primary balance measures the difference between the government revenues and expenditures, excluding the interest payments on the debt. This indicator reflects the fiscal effort and adjustment of the government and affects the dynamics of the debt-to-GDP ratio
- The average maturity measures the weighted average time until the repayment of the debt’s principal. This indicator reflects the rollover and refinancing risk of the debt and affects the sensitivity of the debt service to the interest rate changes
- The average cost measures the weighted average interest rate paid on the outstanding debt. affecting the debt service’s affordability and sustainability.

A possible policy framework for the temporary reduction of the debt pile in the eurozone member states until the harmonization of debt calendars takes effect at the considerable bang enlargement in 2030 could involve the following elements:

A binding and credible commitment by the member states to reduce their debt-to-GDP ratios to below 60% by 2030 or to converge to a lower target if their initial debt levels are too high. This could be enforced by the EU fiscal rules and the European Commission and supported by the European Stability Mechanism and the Recovery and Resilience Facility.
A gradual and differentiated adjustment of the member states’ primary balances, considering their cyclical and structural positions, their growth and inflation prospects, and their social and political constraints. This could be coordinated by the European Semester and the Macroeconomic Imbalance Procedure and guided by the Stability and Growth Pact and the Medium-Term Budgetary Objectives.
A coordinated and diversified extension of the average debt maturities by the member states, taking advantage of the low-interest rate environment and the high demand for safe assets. This could be facilitated by the ECB’s monetary policy and asset purchase programs and by the development of a common safe asset, such as the European bonds issued by the Next Generation EU fund.
A joint and competitive reduction of the average debt costs by the member states, taking advantage of harmonizing the debt issuance calendars and integrating the euro area bond market. This could be achieved by the improvement of the credit ratings and the market access of the member states and by the enhancement of the liquidity and transparency of the debt securities ¹ ²

The pros and cons of harnessing the policy framework for the stabilization of indebtedness of the European nation-state versus the financing of the European welfare state and how it might be used to strengthen the European economy and the EU are:
- The pros are:
  - It would reduce the member states’ fiscal vulnerabilities and debt sustainability risks and increase their fiscal space and resilience to future shocks.
  - It would enhance the credibility and stability of the euro area and foster confidence and trust among the member states and the markets.
  - It would improve the efficiency and integration of the euro area bond market and boost the attractiveness and competitiveness of the euro as a global currency.
  - It would create positive spillovers and externalities for the European economy and the EU, such as lower borrowing costs, higher investment, more vigorous growth, and deeper cooperation.
- The cons are:
The historical role of indebtedness in state-building is a complex and contested topic, but some possible points are:
- Indebtedness has been a critical factor in the emergence and development of the modern state, as it enabled the state to mobilize resources and finance its activities, especially war and public goods provision.
- Indebtedness has also been a source of conflict and crisis for the state, as it constrained the state’s fiscal capacity and legitimacy, exposing it to the pressures and demands of its domestic and foreign creditors.
- Indebtedness has shaped the evolution and transformation of the state, as it influenced its institutional and constitutional arrangements, its relations with other states and actors, and its role and functions in society and the economy.

How do the mountains of debts in the world economy matter?

Global debt is the combined borrowing by governments, businesses, and people. It has reached a record level of $307 trillion in 2023, according to the Institute of International Finance. This matters for two reasons: first, high debt levels imply more state interference in the economy and higher taxes in the future; second, debt must be rolled over at regular intervals, which creates a risk of default or crisis if creditors lose confidence or demand higher interest rates.

Discuss the level of indebtedness in the US, the EU, and China and how it affects growth prospects.

The US, the EU, and China are the three largest economies in the world, and their debt levels vary significantly. The US has the highest debt in dollar terms, at $29.46 trillion, which is 123.28% of its GDP ³. The EU has a debt of $15.8 trillion, which is 90.9% of its GDP. China has a debt of $10.12 trillion, which is 68.06% of its GDP. High debt levels can hamper growth by crowding out private investment, increasing borrowing costs, and reducing fiscal space for stimulus or social spending. However, some debt can also support growth by financing public goods, infrastructure, and innovation. The impact of debt on growth depends on factors such as the composition, maturity, and cost of debt and the credibility and effectiveness of fiscal and monetary policies.

When does the mountain of debt and debt projections become unsustainable?

There is no clear-cut threshold for debt sustainability, as it depends on the ability and willingness of a country to service its debt obligations. However, some indicators that can signal debt distress include a rising debt-to-GDP ratio, a large and persistent fiscal deficit, a high share of foreign currency or short-term debt, a low level of international reserves, a weak banking system, and a loss off market access, and a deterioration of growth prospects.

Are there historical precedents for systemic crashes?

There have been several episodes of systemic crashes in history, usually triggered by a combination of economic, financial, political, and social factors. Some examples are the Great Depression of the 1930s, the Latin American debt crisis of the 1980s, the Asian financial crisis of the 1990s, the global financial crisis of 2007-2009, and the European sovereign debt crisis of 2010-2012. These crises had severe and lasting consequences for the affected countries and regions and spillover effects for the rest of the world.

How does the IMF come into play?

The IMF is an international organization that promotes global economic stability and cooperation. It plays a crucial role in the global debt crisis by providing financial assistance, policy advice, and technical support to countries facing balance of payments or debt problems. The IMF also conducts regular surveillance and analysis of the global economy and the debt situation of its member countries. The IMF can help prevent or resolve debt crises by facilitating debt relief, restructuring, or refinancing and promoting sound macroeconomic and structural policies.

Is there reason to be worried about the situation in the US, EU, and China?

There is reason to be concerned, but not to panic, about the debt situation in the US, EU, and China. These economies face different challenges and opportunities and have different policy tools and buffers to cope. The US has the advantage of issuing the world’s reserve currency, which gives it more fiscal and monetary flexibility, but it also faces political polarization, social inequality, and rising inflation. The EU benefits from a large and integrated market but suffers from institutional fragmentation, slow growth, and low inflation. China has the potential of a dynamic and innovative economy but also faces structural imbalances, environmental degradation, and geopolitical tensions. All three economies must address their debt vulnerabilities and pursue reforms to enhance their resilience and sustainability.

What elements of a growth strategy and the policy architecture are necessary to make it work at the EU and member state levels?

According to the European Commission, the EU growth strategy for the next decade should be based on the following priorities:

Achieving the green and digital transitions, which are essential for enhancing the EU’s competitiveness, sustainability, and resilience
Strengthening the social and economic cohesion and convergence among the member states, regions, and citizens
Increasing the EU’s strategic autonomy and openness in the global arena by promoting a level playing field, fair trade, and multilateral cooperation

To implement this strategy, the EU and the member states need to work together and coordinate their policies, investments, and reforms in line with the common objectives and values of the EU.

Elements:

A coherent and consistent use of the EU recovery funds, which amount to 750 billion euros and are designed to support the green and digital transitions and the recovery from the COVID-19 pandemic
A revision and simplification of the EU fiscal rules, which should ensure budgetary sustainability, flexibility, and transparency, as well as incentivize public investment and structural reforms
A reinforcement of the EU economic governance, which should foster policy dialogue, peer review, and mutual learning among the member states, as well as enhance the role of the European Semester as a tool for monitoring and guiding the implementation of the EU growth strategy
A development and integration of the EU capital markets, banking, and fiscal unions, which should improve the financing and diversification of the EU economy, as well as the stability and resilience of the euro area
A deepening and completion of the EU single market, which should remove barriers and create opportunities for businesses and consumers, as well as foster innovation and digitalization
A strengthening and modernization of the EU industrial and digital policies, which should support the competitiveness and transformation of the EU industry, as well as the development and deployment of critical technologies and infrastructures
A promotion and protection of the EU social rights and values, which should ensure fair and inclusive growth, as well as the participation and empowerment of all citizens, especially the most vulnerable and disadvantaged groups
A design and implementation of the EU green deal, which should lead the EU to climate neutrality by 2050, as well as enhance the environmental quality and circularity of the EU economy
How to move from a tightly-knit growth strategy to a European political economy and onward European capitalism with its objectives and values? What are PE’s and capitalism’s next steps and elements with its goals and values?

The Draghi report is a document that will be prepared by former Italian Prime Minister Mario Draghi, who was asked by European Commission President Ursula von der Leyen to advise the bloc on boosting its competitiveness. The report is expected to be delivered later in 2024.

Evaluation: The Draghi report is a welcome initiative that can set the tone and parameters for the EU’s growth strategy for the next decade. It can also provide valuable input for revising and simplifying the EU fiscal rules by 2024. The report can benefit from Draghi’s experience and expertise as a former central banker, economist, and politician, as well as his reputation and credibility in the EU and beyond. However, the report also faces some challenges and limitations, such as:

The complexity and diversity of the EU economy, which requires a nuanced and balanced analysis of the different sectors, regions, and stakeholders involved
The uncertainty and volatility of the global environment, which poses risks and opportunities for the EU’s competitiveness but also makes it difficult to predict and plan for the future
The political and institutional constraints, which may limit the scope and feasibility of the report’s recommendations, especially if they require treaty changes, legislative reforms, or budgetary adjustments
The potential resistance or opposition from some member states, industries, or interest groups, who may have different views or preferences on the EU’s economic policies and priorities

Improvements: The Draghi report can be improved by taking into account the following suggestions:
- The report should be based on a comprehensive and evidence-based assessment of the EU’s strengths, weaknesses, opportunities, and threats, using relevant data, indicators, and benchmarks
- The report should be aligned with and supportive of the EU’s existing objectives and values, such as the green and digital transitions, the social and economic cohesion, and the strategic autonomy
- The report should be realistic, pragmatic, ambitious, and visionary, proposing concrete and actionable measures to make a difference in the EU’s short-, medium–, and long-term competitiveness.
- The report should be inclusive and participatory, involving a broad and diverse range of stakeholders, such as the EU institutions, the member states, the regions, the social partners, the civil society, and the academia.
- The report should be transparent and communicative, using simple and accessible language and highlighting the main messages, findings, and recommendations.

The European political economy studies the interaction between politics and economics in the EU and how they affect the process and outcomes of European integration. It covers EU economic governance, the single market, industrial and digital policies, and strategic autonomy. A European capitalism with its objectives and values would imply a shared vision and a coherent framework for the EU’s economic and social development based on principles such as democracy, solidarity, sustainability, and competitiveness. Some of the elements that could contribute to this goal are:

A fiscal union, which would entail a common budget, a common debt instrument, and a common fiscal authority for the euro area, as well as a harmonization of tax policies and coordination of budgetary stances across the EU
A banking union, which would entail a single supervisory mechanism, a single resolution mechanism, and a standard deposit insurance scheme for the euro area banks, as well as a reduction of risks and completion of the banking integration across the EU
A capital markets union, which would entail a harmonization of rules and standards, removal of barriers, and creation of opportunities for cross-border investments and financing across the EU, as well as diversification and deepening of the EU capital markets
A social union, which would entail a reinforcement of the social dimension of the EU, an implementation of the European Pillar of Social Rights, and the creation of a social protection floor for all EU citizens, as well as a promotion of social dialogue and participation across the EU
A green deal, which would entail a comprehensive and ambitious plan to achieve the EU’s climate and environmental objectives, mobilization of public and private resources for green investments and innovation, and the creation of a just transition fund to support the most affected regions and sectors, as well as leadership and cooperation of the EU in the global climate action
A digital agenda, which would entail the development and implementation of a common digital strategy, the creation of a digital single market, and support for the digital transformation of the EU economy and society, as well as protection and empowerment of the EU citizens’ digital rights and freedoms
A trade and investment policy, which would entail a definition and promotion of the EU’s interests and values in the global arena, negotiation and enforcement of fair and balanced trade and investment agreements, and support for the multilateral trading system and the reform of the World Trade Organization, as well as diversification and resilience of the EU’s external supply chains and partnerships

The following steps to move from a growth strategy to a political economy and onwards to a European capitalism with its own objectives and values would require a strong political will and commitment from the EU institutions and the member states and a broad and inclusive consultation and dialogue with the EU citizens and stakeholders. It would also require a revision and adaptation of the EU treaties and legislation and mobilization and allocation of the EU resources and instru-ments to reflect and support the EU’s common vision and framework.

As you may discern, a difficult balancing act is ahead, however, difficult it is to comprehend in the peripheries of Europe and in the suburbs of the world. This does entail rewarding the human who makes a difference and makes France and Germany cohere notwithstanding female transgressions, exploitation and slavery, and forms of abuse of power.