The EU’s leaders have rightly been focused on mitigating the damage that Washington’s new trade war threatens to inflict upon their economies. Yet amid the havoc, there is an opportunity that they should not miss — one that could help them solve some pressing financial problems.
It is hard to overstate the benefits the US has derived from its Founding Fathers’ decision, in the late 18th century, to grant its treasury the power to issue federal obligations and collect the taxes to pay them. Since then, US Treasury securities have become the haven where the world keeps its money. They form the foundation of the US’ capital markets, facilitating investment in everything from infrastructure to artificial intelligence.
The new administration’s economic policies could well undermine that special status. Its ill-considered, chaotically imposed tariffs would fuel inflation and uncertainty, making Treasury securities a riskier proposition. If the US Congress makes the 2017 tax cuts permanent, the multitrillion US dollar debt issuance required to finance the yawning budget deficit would further burden a government-debt market that has already shown signs of strain.
None of that bodes well for the US or the global economy. However, it does create an opportunity: If some other entity could establish a high-quality, highly liquid safe asset to compete with the US Treasury, it could reap some of the immense financial advantages the US has long enjoyed.
Yet who has the necessary credibility, scale and capacity to absorb global capital?
That is where the EU comes in. It needs to raise hundreds of billions of euros in the coming years to invest in EU-wide public goods, including stronger defenses against a belligerent Russia, better infrastructure and a greener economy. It also desperately needs a common safe asset to help unite its fragmented, underdeveloped capital markets. EU bonds, backed by the joint fiscal resources of its member states, could offer a solution to all those problems.
Granted, the EU has not always distinguished itself in fiscal matters. The euro area nearly split apart in the 2010s over Greece’s excessive borrowing. However, so far the bloc has always muddled through, and it recently adopted an improved framework to keep debts and deficits under control. Its member states’ budgets are much closer to balance than the US’. It also has some experience issuing joint debt, having raised hundreds of billions of euros under its NextGenerationEU program, designed to aid recovery from the COVID-19 pandemic.
Political obstacles abound. Northern member states, notably Germany, worry about free riding. The benefits of defense spending, for example, would not necessarily be distributed equitably across EU members: Some are closer to Russia; some would receive more military orders than others. Such problems could be addressed by focusing any mutually financed investment on clearly EU-wide public goods (think air defense or combating climate change) and by forming different coalitions for different goals. Ideally, the EU would designate specific revenue for repayment — green transition bonds, for instance, could be backed by proceeds from an expanded emissions trading system.
The European Commission is supposed to propose a new long-term budget this year, which could be propitious timing. Europe’s leaders increasingly recognize that they cannot address their investment challenges without greater cooperation. If they can demonstrate the political will to raise the necessary public capital, private capital would follow. There might never be a better chance.
The Editorial Board publishes the views of the editors across a range of national and global affairs.
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