International Economy Magazine: EU Bonds - Is Europe Playing with Fire?
I was pleased and honored to be asked by International Economy Magazine to contribute to a feature on the European Union’s use of EU Bonds.
The topic reached a new plateau of discussion earlier this year when France’s Finance Minister Eric Lombard warned that his country might be forced to turn to the IMF for a bailout amid growing fiscal troubles and a dysfunctional government. Of course, bailing out advanced industrialized countries like France is not practical, considering the IMF’s overall resources.
But this also raised the question of whether European officials are considering an entirely new approach to fiscal/debt policy management and liquidity?
The first steps to this change in approach, some would argue, came earlier this year when Germany altered its constitution to remove its fiscal debt brake (debt not to exceed 60 percent of GDP). Many officials warned that this change could give the green light to other, financially less stable European countries that want to increase their already bloated budgets.
Taking it a step further in understanding what is potentially in play, other questions quickly arise, including:
Is the next step in this new policy the beginning of even more widespread use of EU bonds? The European Commission is pushing for further issuance of EU bonds in the name of the European Union. The volume of outstanding EU Bonds has already reached €650 billion. Yet, from a legal standpoint, EU bonds do not fall within the category of government bonds, principally because the European Union is not permitted to incur its own debt and has only limited scope to raise its own revenues. The EU member states bear responsibility jointly and severally, meaning one or more member states can be held responsible for the amount of a bond issue if other, financially weaker members cannot meet their obligations.
What could be the consequences of these controversial changes? Will these moves enhance the liquidity of European financial markets, which could be particularly useful at a time when European governments are rearming militarily? Note that the European high command also hopes to “professionalize” Europe’s capital markets by having Eurex Futures launch EU-Bond futures.
And most importantly, is this new approach involving EU bonds and other changes a welcome development or a controversial gimmick that could jeopardize the credibility of European financial markets? After all, it is still undecided whether such bonds used in this way contradict the “no-bailout” clause of Article 125 of the EU treaty. Are these wise moves, or are European policymakers playing with fire?
I took a shot at addressing these questions in a short essay alongside a distinguished group of economists and political analysts. You can read all the pieces HERE at The International Economy Magazine Website. Otherwise, my piece is below:
The European Union needs to move forward and quickly on utilizing EU-Bonds
FRANCIS J. KELLY
Founder & Managing Partner, Fulcrum Macro Advisors
The question of whether the European Union can and should pursue greater reliance on EU Bonds is particularly timely, as the EU truly grapples with taking the steps necessary for a more robust common defense and greater competitive capabilities. To date, there is clearly an appetite among financial markets for them as well. Indeed, a new €175 billion double-tranche was issued on October 8, bringing the overall market size to more than €650 billion. I would argue that the successful placement alone answers the question of whether EU bonds are good for liquidity in European financial markets.
However, to the broader question of the European Union more robustly using EU-Bonds (and settling the questions and challenges around the EU Treaty’s Article 25), it really can only be answered after other, more challenging questions are first answered regarding EU leadership. First, are EU leaders truly committed to making the structural changes needed to meet the challenges Mario Draghi outlined in his competitiveness report? And second, who within the European Union is capable of successfully championing the expanded use of EU-Bonds?
Arguably, the answers to those two questions are “yes, sort of” and “no one,” respectively. At the time of this writ- ing, the “Big Three” of the EU power structure—European Commission President Ursula von der Leyen, French President Emmanuel Macron, and German Chancellor Friedrich Merz—are besieged by weak economic outlook reports and growing domestic political challenges (or in the case of von der Leyen, two more no-confidence votes from the EU Parliament—the second round of the year).
Meanwhile, Chancellor Merz—who wisely achieved relief from the debt brake—is now grappling with anemic growth projections for 2026, anticipated to come in around 0.2 percent, with industrial production having dropped to 2005 levels. At the same time, the far-right AfD party’s poll numbers are rising to new heights. Fortunately, the economic outlook is likely to change mid-year 2026, with significantly healthier growth projections for 2027 and beyond.
As for President Macron and France, it seems only a matter of time before new parliamentary elections are called, with a serious risk that Marine Le Pen’s National Rally Party will finally break through and win a parlia- mentary majority—an event that will have massive fiscal and market ramifications for France, which will bleed over to the rest of the European Union.
So, for the near term, it would appear nearly impossible for Merz, Macron, or von der Leyen to lead the charge for greater use of EU-Bonds, meaning the best hope may be the emergence of a broader coalition of EU leaders making the case for a more robust EU bond market.
But the bottom line is that the European Union needs to move forward quickly on using EU bonds more broadly. The global competitive gap is growing by the day. And Russia is proving to be increasingly aggressive and volatile toward EU/NATO nations. All current political and economic challenges aside, the European Union will only lose by not pursuing a broader EU-Bond marketplace.