The Evolving Dialogue on European Debt

Abstract

Abstract The recourse to common European debt has expanded significantly over the past two decades. From crisis resolution to public investment, debt instruments have proliferated in volume and design. As negotiations intensify on the next Multiannual Financial Framework (MFF), the role of debt-based funding has returned to the spotlight. Despite a widening scope of applications, debates on how common debt should evolve in Europe remain entrenched in a well-known standoff. Addressing long-standing concerns on the risk of moral hazard, implied costs and the role of conditionality will be central to any future consensus. This paper aims to understand how these concerns have evolved, and where key trade-offs arise, focusing on two important areas of contention. First, financial trade-offs have been central to political consensus, with the implied costs and benefits distributed differently across Member States. As fiscal space becomes more constrained in the future, these considerations will become increasingly important. Second, policy trade-offs, particularly regarding conditionality, have evolved considerably over successive crises. As use cases of common debt have expanded, different models of safeguards have emerged in line with the underlying aims of each instrument. Any future agreement will need to preserve these safeguards while ensuring they remain aligned with the purposes they are designed to serve.