Joint borrowing will be acid test of EU growth agenda: Peacock

Zawya

09-05-2025

(The views expressed here are those of the author, the former head of communications at the Bank of England.)
The United States' apparent retreat into protectionism gives the euro zone the opportunity to push through reforms that could enable it to become the economic superpower its size warrants.
The most controversial of these – and most important – is common borrowing.
Global investors seem to be questioning the safety of U.S. debt given President Donald Trump's aggressive trade tactics and other unorthodox policies.
There should thus be demand for an alternative to the $28 trillion Treasury market that could one day offer significant depth and liquidity, with much less political uncertainty. Jointly issued euro zone bonds could be just that.
All euro zone member states currently enjoy investment grade credit ratings, though many are well below the gold "AAA" standard that euro zone joint debt would likely receive.
Pooled debt could thus allow European nations to borrow more cheaply than they could otherwise do, while creating another safe haven asset for global investors.
While the pool of euro zone government bonds is much smaller than the Treasury market and commonly issued debt would be only a fraction of that, the latter could scale up quickly if investor appetite is there.
Importantly, joint debt could help fund the massive EU-wide spending plans that the European Commission is seeking, unleashing massive purchasing power and potentially driving down procurement costs.
Former European Central Bank President Mario Draghi's roadmap for spurring economic growth, released last September, said the EU needs to invest an extra 800 billion euros a year to banish an era of low productivity.
The European Commission says it is working off this plan to deliver "long-term competitiveness, security and the digital and green transitions".
One of the largest components of this is defence spending, as EU leaders face the potential for ongoing Russian aggression and U.S. withdrawal.
The Bruegel think-tank calculates that integrated markets and scaled-up procurement could halve unit costs here.
To push forward this reform agenda, the European Parliament is due to vote this month on a proposal to double the bloc's budget to 2% of all its member states' GDP. That could potentially create a larger revenue stream to underpin joint debt if it were issued.
Over time, if the euro zone replaced some national borrowing with bloc-wide euro bonds, this could also help cut government debt piles, as could the stronger economic growth that coordinated investment could deliver.
"All this would reduce the vulnerability of the EU economy and its financial system," Bruegel said in a recent analysis.
OPPOSITION
Political opposition to common borrowing in the EU has long been stiff from Germany and other northern European states, rooted in fears that their fiscal rectitude would be taken advantage of by spendthrift partners, like Greece and Italy.
But these objections appear less valid than they once were.
First, bond yield spreads between EU members that gaped wide during the euro zone crisis have narrowed dramatically over the past 15 years.
And even though national debt piles in Greece and Portugal remain high, they both run primary budget surpluses and have growth rates that Germany could only dream of.
The German economy has shrunk in each of the last two years while Greece grew by 2.3% in both 2023 and 2024 and Portugal expanded by 2.5% and 1.9%, respectively.
If fears remain about bankrolling poorer EU states, the bloc could address these by restricting common borrowing to specific investment goals, such as greater defence spending, green energy and digital infrastructure, so that money could not be funnelled to countries' pet projects.
Moreover, Germany may be less inclined to raise objections than in the past, given that it stands to gain much from an EU-wide drive to spur investment. The current coalition government's decision to unshackle itself from a restrictive "debt brake" suggests a new willingness to think the unthinkable.
Additionally, the joint borrowing taboo has already been broken in a limited fashion, as common borrowing has underpinned one-off schemes such as the EU's Covid recovery fund.
The European Commission is also planning some 150 billion euros of joint borrowing in new defence spending over the next four years.
Finally, the European Union has indicated that one of its priorities is to create a long-planned savings and investment union to unlock some of the bloc's 33 trillion euros in private savings, much of it held outside the region.
Without joint borrowing, it may be challenging to develop a deeper, more integrated capital market, meaning the region would likely be unable to leverage its combined spending and investment power.
Of course, there are potential pitfalls. If the currency bloc were to lure a wave of capital, it could drive the euro higher and challenge the region's export base.
And rivalling the massive U.S. bond market, underpinned by the globally dominant dollar, will not be easy. But the EU does not need to achieve that to gain significant benefits from joint borrowing. And given its investment needs, doing nothing is no longer an option.
The European Commission is talking a good game on the reform agenda, as are some EU heads of government. But common borrowing is their acid test.
(The views expressed here are those of Mike Peacock, the former head of communications at the Bank of England and a former senior editor at Reuters).
(Writing by Mike Peacock Editing by Anna Szymanski and Gareth Jones)