Why new EU debt is irresponsible

The Ukraine war, the US aid package worth billions (IRA) or the energy transition: the EU is facing enormous challenges.

In view of this, EU Economic Commissioner Paolo Gentiloni is again pushing for new joint debts to be taken out.

But the approach is highly problematic, warns the former head of the Munich Ifo Institute, Prof. Hans-Werner Sinn.

Because of the high inflation, future generations will not bear the burden, but savers and pensioners - today.

Munich – The EU Commissioner responsible for the economy, Paolo Gentiloni, needs money, a lot of money.

And since he doesn't get the money directly from the EU countries, he wants to get into debt.

For what, that almost doesn't seem to matter.

The main thing is that the money flows.

In 2020, he played a key role in the decision on the "Next Generation EU Fund", which made it possible to borrow more than 800 billion euros to combat the consequences of Corona.

In May 2022, he wanted to take out loans to finance aid to Ukraine.

In October 2022 he wanted the EU to go into debt to fund the gas purchases of Europe's citizens.

And now he is demanding new EU debt in order to survive a subsidy race with the USA, which of course has decided on new taxes for the planned subsidies (Inflation Reduction Act).

In fact, the bold justifications seem to be just an excuse to get more money.

For example, the NG-EU fund distributed the Corona funds among the citizens of Europe using a method that shows no correlation whatsoever with the severity of the pandemic, but shows a negative correlation with GDP per capita.

Individual poorer countries that had only a few Covid cases to complain about received a striking amount.

voice of economists

Climate change, corona pandemic, Ukraine war: Rarely before has interest in the economy been as great as it is now.

This applies to current news, but also to very fundamental questions: How do the billions in corona aid and the debt brake go together?

What can we do about the climate crisis without jeopardizing our competitiveness?

How do we secure our pension?

And how do we generate the prosperity of tomorrow?

In our new series  ,

 , Germany's leading economists provide guest contributions with assessments, insights and study results on the most important economic issues - profound, competent and opinionated.

According to its own rules, the EU must not become indebted

A major problem with Gentiloni's policy is that according to its own rules, the EU is not allowed to get into debt at all.

Article 311 of the Treaty on the Functioning of the European Union (TFEU) clearly stipulates that the EU must finance itself "entirely from its own resources", i.e. it must not resort to borrowed capital, i.e. debt.

That is why unanimity among all EU countries was required for the next generation decision.

From an economic point of view, a major problem lies in the unclear carrying capacity of the debt.

The EU is often countered with the argument that its policies lead to a burden on future generations who have to service the debt.

While this advice is fundamentally correct, it is still not true today, because the burdens lie elsewhere. 

Europe is suffering from stagflation

Like so many countries in the western world, Europe suffers from massive inflation, indeed stagflation.

A stagflation is a situation where supply is limited for structural reasons, be it a pandemic, war, strikes, energy shortages, inefficient administrative structures or demographic problems, while demand is artificially stabilized at a level above that earned by production people's income lies.

Excess demand creates inflation.

National debt is the most important means with which politics contributes to such an excess of demand over supply, because unlike tax financing by the state, those who are really burdened are clouded by inflation and initially do not react by cutting demand.

No sustained decline in the inflation rate in sight

Inflation is now fading somewhat, but it is still huge.

Currently, the inflation rate in the euro zone is 8.5 percent.

That's more than four times what was commonly considered the upper limit of tolerable inflation (2 percent).

Since even the core inflation rate adjusted for energy and food prices was 6.2 percent recently, a sustained decline in inflation is not to be expected for the time being.

In the future, a new wave of inflation is being prepared due to high wage demands from the trade unions.

Even in the 1970s, during the last great inflation, a price-wage-price spiral only set in with a delay.

The war in Ukraine, which led to the interruption of Russian energy supplies to Europe, and the approaching retirement age of the baby boomers also point to a persistently high risk of inflation.

Inflation: Today's savers and retirees bear the burden of debt

Because of inflation, it is not the future generations who are bearing the burden of debt today, but today's savers and pensioners, who have laboriously saved the pennies from their mouths throughout their working lives in order to secure their standard of living in old age.

Small savers in particular, who have too little to be able to invest their money in real assets and have therefore acquired nominal value-secured assets such as savings or life insurance, are the victims.

They bear the burden of any further indebtedness on the part of state authorities, be it at national or European level.

This burden is not only unfair, it can ultimately also cause such massive redistribution effects that society breaks up as a result.

In his memoirs, the writer Stefan Zweig vividly described how German inflation a hundred years ago impoverished and radicalized the petty bourgeoisie.

Nothing made the Germans so "hateful and ripe for Hitler" as the great inflation.

The American historian Gerald Feldman has backed up this position with an impressive wealth of facts in his thousand-page standard work on German inflation.

also read

Location ranking: Germany's decline is worrying

Location ranking: Germany's decline is worrying

Energy crisis: Were the warnings about the consequences of stopping Russian gas supplies exaggerated?

Energy crisis: Were the warnings about the consequences of stopping Russian gas supplies exaggerated?

Who pays the bill?

Who pays the bill?

Inflation: resist the beginnings

Sure, today Europe is nowhere near hyperinflation like Germany experienced a hundred years ago.

But every inflation starts small.

In this respect it means “principiis obsta”, “resist the beginnings”.

Any new EU debt is not only legally questionable, it is economically irresponsible.

The new debts planned by the EU Commission and also by the national governments of the EU, for which new justifications are being sought and the old debt rules would like to be abolished, are clearly inflationary.

They mean that Europe is no longer a community of stability.

The distributional consequences could split European society and endanger the euro.

Central banks in the USA and the euro zone are now taking the risk of inflation seriously

It cannot be ruled out that the creditworthiness of European government bonds will also suffer and create conditions such as Great Britain has just experienced under Prime Minister Liz Truss, who, despite all warnings, wanted to further increase the already very high national debt.

Finance capital fled the consequences of such policies, the pound depreciated, the country trembled and the prime minister had to step down from government after less than two months. 

The central banks of the USA and the euro zone are now taking the risk of inflation very seriously and are trying to counteract it by increasing interest rates.

It would be devastating for the stability of the euro and the idea of ​​European unification if the EU actually followed the course suggested by Gentiloni at its upcoming summit.

Any debt, however good the proclaimed purposes, is now inflationary.

That doesn't mean you shouldn't pursue good causes.

But today you have to name horses and riders and free up as much state funding as is needed elsewhere through tax increases or transfer cuts.

Eurozone parliaments have to give the EU the money it wants from national budgets, and if they don't want it, then it just isn't there.

About the author: Prof. Hans-Werner Sinn, retired professor of economics and public finance at the Ludwig-Maximilians-University in Munich, was President of the Munich ifo Institute for Economic Research and advisor to the German Ministry of Economic Affairs.

His latest book is entitled: The miraculous increase in money: National debt, negative interest, inflation, Herder, Freiburg 2021.