Indebted EU member states propose a common credit card: Who would pay the bills?

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BrusselsReport.eu
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By Ernestas Einoris, policy analyst at the Lithuanian Free Market Institute

A pivotal 400-page report on the competitiveness of the European Union (EU), authored by Mario Draghi, former Governor of the European Central Bank and Italian Prime Minister, casts a stark light on the Bloc’s economic stagnation. The report underscores the alarming widening gap between the EU and its global competitors, China and the United States, particularly in the high-tech sector – a domain central to shaping the future. Draghi’s sobering analysis identifies government intervention as the cornerstone for recovery, advocating for an additional €800 billion in annual public investment to prevent the EU from plunging further into economic disarray.

However, Draghi’s proposed solution – jointly incurred debt shared among all EU member states – has sparked fierce debate. While proponents argue that a “common credit card” could foster deeper integration and provide financial relief to struggling nations, critics contend that such a scheme would penalize fiscally responsible countries and perpetuate reckless spending. This policy proposal lays bare the economic rift between southern European nations burdened by colossal debts and the more financially disciplined states of the north and eastern EU.

A Debt-Laden Europe

Draghi’s home country, Italy, exemplifies the severity of the EU’s fiscal predicament. With a debt-to-GDP ratio nearing 140%, Italy resembles a ship dragging an anchor heavier than itself. Other southern European nations, such as Greece, bear even heavier burdens, with debt levels surpassing 160% of GDP. These countries, many of which have struggled with systemic inefficiencies and excessive public expenditures for decades, see collective debt as a lifeline. Not surprisingly, their governments – alongside France – have embraced the notion of shared borrowing.

Conversely, nations like Denmark, the Netherlands, Germany, and the Baltic States, which boast significantly lower debt levels, vehemently oppose the idea. They argue that joint debt issuance would reward fiscal irresponsibility and punish prudent economic management. For these nations, Draghi’s proposal appears less a pathway to integration and more a redistribution of financial burdens that undermines core principles of accountability.

Structural Reform vs. Debt Mutualization

Critics of shared EU debt frequently emphasize the moral hazard it creates. Providing struggling nations with access to a collective credit card risks encouraging further fiscal reclessness, facilitating economic populism. Instead of implementing essential structural reforms to curb inefficiencies and reduce public sector waste, governments may be tempted to continue unsustainable spending practices in pursuit of short-term electorial gains.

A useful analogy highlights this concern: imagine a classroom where all students’ final grades are averaged. The diligent students who studied hard and completed their assignments would receive lower grades than deserved, while the inattentive ones would benefit unfairly. Similarly, joint debt issuance risks disincentivizing responsible economic behavior, undermining the very integration it purports to achieve.

The Case Against Shared Debt

Northern and fiscally responsible EU nations argue that Europe’s economic malaise stems not from insufficient government spending but from bureaucratic inefficiencies and the neglect of necessary systemic reforms. Germany, in particular, has been a vocal opponent. When it was proposed, then-Finance Minister Christian Lindner dismissed Draghi’s proposal, asserting that more subsidies and collective borrowing will not resolve the EU’s structural weaknesses.

The debate extends to fiscal discipline rules. Established to curb excessive borrowing and prevent unsustainable debt accumulation, these regulations face growing pressure from southern European countries seeking their relaxation. They argue that borrowing restrictions stifle growth. Yet northern states maintain that loosening these rules would further entrench cycles of dependency and financial mismanagement.

Burdening the East

As Central and Eastern European economies mature, their roles within the EU are shifting. No longer merely recipients of EU funds, these nations are becoming net contributors. A collective debt would impose additional burdens on their taxpayers, requiring them to shoulder not only their own debts but also those of more profligate members. This prospect risks fostering resentment and deepening divisions within the bloc.

While proponents of joint debt present it as a step toward greater cohesion, its implementation could have the opposite effect. Saddling fiscally responsible nations with the debts of their less disciplined counterparts may undermine trust and exacerbate existing tensions. Far from promoting unity, such a move could fracture the EU along lines of economic prudence and national self-interest.

Conclusion

Draghi’s vision of a common EU credit card is undoubtedly ambitious, but it is fraught with peril. By prioritizing shared debt over necessary reforms, the EU risks incentivizing fiscal irresponsibility and sowing discord among its members. Rather than pursuing policies that reward inefficiency, the EU must focus on structural reforms that enhance productivity, streamline governance, and foster sustainable growth. Only then can the EU hope to bridge the economic divide with its global competitors while preserving the trust and cooperation essential to its survival.

 

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