How Compelling is the Case for Common European Debt?

Abstract A larger EU common debt stock has been credited with improving financial stability, lowering public borrowing costs, facilitating capital market integration, and expanding the international role of the euro. While there are good theoretical and empirical arguments for these claims, they apply mainly in a politically unrealistic case: common debt issuance in a fiscal union where the EU-level issuer has control over tax revenue, conducts stabilization policy, and issues most new public debt. However, most of the associated benefits do not apply to the main proposals currently on the table: and almost none apply to the most politically realistic case, a temporary increase in common debt to finance a specific European public good. This said, some of the benefits of EU debt in a fiscal union could potentially be achieved by proposals that stop well short of fiscal union, either by strengthening the institutional basis of EU bond issuance or by issuing EU-level bonds backed by national bonds. Whether these proposals would succeed depends critically on whether the resulting debt would be treated as sovereign by investors. If so, borrowing costs could fall significantly; if not, the gains would remain marginal.