Mind the gap: Bringing EU debt into the Stability and Growth Pact

EU debt has become a noticeable feature of Europe’s fiscal architecture. However, EU fiscal rules focus solely on national public finances. They have a blind spot for EU debt, which calls their goal of fiscal sustainability into question. This column proposes a simple way to bridge this gap. Under our proposal, additional EU borrowing would be matched by a corresponding reduction in national borrowing. The mechanism would make the fiscal burden of EU debt visible in national statistics without reopening the recently reformed rules. It could also strengthen the safe-asset properties of EU bonds.

Fiscal sustainability is a cornerstone of a stability-oriented Economic and Monetary Union. EU fiscal rules seek to safeguard sound public finances. They focus on individual member states, reflecting an architecture before large-scale EU borrowing was foreseeable. However, EU debt is no free lunch either (Larch and Lucius 2026), since member states’ populations have to provide the resources (Deutsche Bundesbank 2020). Hence, fiscal rules cannot safeguard sound public finances if they have a blind spot for EU debt.

Fiscal sustainability has become a growing concern worldwide (IMF 2026, OECD 2026, World Bank 2026). In the euro area, many countries have high public debt and in some cases deficits well above the levels set by EU fiscal rules. Substantial debt has also accumulated at the EU level on top of national debt. And additional common EU borrowing remains under discussion. Recent proposals advocate, for example, common issuance for a deep and liquid European safe-asset market (Blanchard and Ubide 2025, 2026), common defence investment (Hildebrand et al. 2025) or a central fiscal capacity (Bianchi et al. 2026).

Our proposal does not take a position on whether additional EU borrowing is desirable or how it should be designed. Instead, it focuses on a complementary question that we consider essential: how can EU borrowing be transparently integrated into the fiscal framework without reopening the recently reformed and politically hard-won rules? In our view a holistic view of fiscal burdens is required: additional EU debt should be accompanied by correspondingly lower national borrowing. Bundesbank President Joachim Nagel has recently argued along these lines (Nagel 2026). This column sets out a practical way to implement that principle, thereby also complementing recent calls for transparency (Larch and Lucius 2026).

Find the gap

The EU already issues debt, most prominently through NextGenerationEU, which finances loans and grants to member states (European Commission 2022).

The risk of underestimating debt burdens does not arise when EU borrowing is passed on to a member state as a loan. The loan is reflected in the member state’s fiscal indicators similar to borrowing on the capital markets; the resulting deficits and debts therefore fall under the EU fiscal rules on the national level.

By contrast, EU borrowing for grants to member states or direct EU expenditure creates liabilities absent from national deficit and debt figures and hence outside the fiscal rules. Yet this additional debt must ultimately be serviced from resources provided by people in the member states and therefore it also affects fiscal sustainability.

Close the gap: A proposal

Amending the Stability and Growth Pact to include EU deficits and debt would be politically difficult and institutionally cumbersome. There is a simpler alternative with some additional benefits.

Our proposal stipulates that whenever the EU issues debt that is not reflected in national debt, member states simultaneously issue national government bonds and transfer them to the EU. The aggregate principal amount of these bonds would equal the principal amount of the new EU borrowing. A natural allocation key for the bonds to be transferred would be the member states’ shares in EU gross national income, broadly corresponding to how the EU budget is financed. Suppose, for example, that the EU issues €100 billion in additional debt. Member states would transfer national bonds with a combined value of €100 billion to the EU. A member state with a 20% share under the agreed allocation key would transfer bonds with a nominal amount of €20 billion. Other burden-sharing arrangements would be possible if politically agreed.

Crucially, the bonds would be transferred to the EU without consideration: the EU would acquire a financial claim on the member state, while the member state would receive neither cash nor a financial claim against the EU in return. The national bond therefore represents the member state’s share of the fiscal burden associated with EU borrowing.

The EU would hold these bonds until maturity, ideally aligned with EU bond maturities. National redemption payments would finance EU debt repayment. If EU debt were rolled over, corresponding national bonds would also be rolled over.

Interest payments could be designed in different ways. One option would require each member state to pay its current market yield. This would leave the country broadly in the same financial position as if it had borrowed nationally. Alternatively, all countries could pay a common rate corresponding to the EU’s funding cost. This would imply redistribution from low-yield to high-yield member states. Such an (implicit) redistribution is a political choice.

How the proposal would work

The mechanism affects the national indicators underpinning the fiscal rules.

National debt: Issuing government bonds and transferring them to the EU increases national Maastricht debt because the liability is held outside of the member state’s general government sector.

National deficit: Incurring a liability without receiving an equivalent financial asset entails a capital transfer to the EU. This increases the national deficit and net expenditure under the fiscal rules, as do interest payments on the transferred bond.

At maturity, the member state repays its bond to the EU, which uses the proceeds to redeem its market debt (both may be rolled over).

Capturing the capital transfer in member states’ net expenditure makes their burden visible in the indicators used for fiscal surveillance. Statistics would broadly resemble national financing of each country’s share of common expenditure, while the EU would remain the market issuer.

As a result, additional EU borrowing would no longer create fiscal space outside the fiscal framework. The member states would have to be more ambitious to the rest of their budgets to remain on the agreed fiscal paths. And EU debt would also be taken into account, when the path is defined. Higher EU borrowing would therefore be offset by lower ‘pure’ national borrowing.

Figure 1 illustrates this. Adding annual EU borrowing of, for example, 1% of GDP from 2029 to euro area fiscal plans raises the combined public debt ratio above the planned medium-term path. Compensating national adjustments leave the planned overall debt path unchanged.

Figure 1 EU borrowing should not raise the overall debt path

Source: Authors’ calculations based on European Commission (2026).

Benefits for fiscal sustainability, transparency, mutual liability risk, and EU bond safety

The proposal prevents joint EU borrowing from weakening overall fiscal constraints. It does not determine whether additional EU borrowing should take place. This remains a political decision. Rather, it separates two sometimes intermingled aspects: Whether a task should be financed or provided at the national or European level, and how much debt is perceived sustainable.

Transparency would improve: Parliaments, fiscal councils, voters and markets could assess each country’s share of EU debt using familiar indicators. Credibility requires consistently capturing fiscal burdens, alongside implementation, national ownership and even-handed enforcement (Janeba and Larch 2025, Hasekamp and Larch 2026).

The proposal could also strengthen member states’ incentives to service EU debt. Currently, EU bonds are mainly backed by member states’ commitments to finance the EU budget. A member state that fails to honour such a commitment could face political and legal consequences. However, the commitment to contribute to EU debt service costs may increase if it is additionally backed by the transferred national bond. Any default on the commitment would have strong and immediate consequences in financial markets. This would strengthen the incentives to contribute to EU debt service, thereby reducing the risk of mutual liability and providing additional safety for EU bonds. The proposal could complement – or partly replace – existing safeguards.

Conclusion

EU borrowing exposes a gap in Europe’s fiscal architecture: the EU population services both national and EU debt, but fiscal rules constrain only the former, not the latter. However, the choice of issuer should not determine the amount of debt space and European projects should be chosen for their added value – not because common borrowing escapes fiscal limits.

We propose a simple and transparent way to close the gap without another reform of the fiscal rules: any new EU borrowing should be matched by the member states transferring the same amount of national bonds without consideration to the EU. As a result, (1) the burden of EU borrowing would become visible in national deficit and debt figures, (2) the aggregate constraint intended by the Stability and Growth Pact would be preserved – higher EU borrowing would be offset by lower ‘pure’ national borrowing, and (3) national backing for EU bonds would be strengthened.

Source : VOXeu