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A Hamiltonian moment for the EU?


Jean-Pierre Dumas

March 11, 2024


After the Magic Money Theory (MMT) (S. Kelton), comes the Magic Common Debt Theory (MCDT), in an article published by Bloomberg “Bond investors are lining up to fund the war against Putin,” March 11, 2024, S. Rao & A. Oyamada, argue that it is necessary for European countries to raise funds to defend Ukraine against Russia and that this should be done through pooled borrowing.

The objective of dramatically increasing military spending to help Ukraine against Putin is unquestionable, the way proposed by the markets and European institutions is very questionable.


The bond sector is proposing a joint EU bond issue to increase military spending in favour of Ukraine, and they are very keen to finance it. The arguments are: It is easier and more efficient to borrow collectively than individually at the national level, and the joint European debt will not appear in the national public debt ratio (Maastricht definition). 

The ideology behind this idea is backed by very clear interests which, for once, are aligned, the bond market and the European Commission. The market, awash with liquidity, is eager to finance large bond issues (AAA-rated), guaranteed, of course, by national governments under the direction of the European Commission. EU bonds are now slightly more expensive (in terms of interest rate) than French bonds. In this case, what is the point of borrowing at the European level? (What is the meaning of a triple-A rating  at the European level, higher than the rating of most EU countries?)

For some “economist”, “The beauty of EU bonds is that the debt does not appear in your national statistics” (M. Kramer, “chief economist” at German bank LBBBW…), therefore, it will not be a fiscal burden. Of course, this argument is completely false. If it does not appear in the Maastricht definition of public debt, and since there is no shadow debt, where does it appear? The common debt is ultimately nothing else than a national one, it should be included within the national sovereign debt burden (Maastricht definition); the debt is not a “contingent” liability, it is a certain national liability..

Someone will have to pay back this additional debt. Who will pay? The European commission (EC), the EC has no money on its own (it has a small budget which should be balanced). If it is the case, the EC will have to raise taxes in addition to the member states. These will be additional taxes to the existing national ones, because I doubt that member states will reduce or eliminate their national budgets. There is no such thing as European taxpayers, the only taxpayers are the national citizens.

Another solution could be to allow the EC to run a deficit financed by borrowing. Who will pay? On the horizon, I can only see the national taxpayers. Obviously, the Commission, which has no (or very few) resources, will ask for an unconditional guarantee from national governments (to start with the triple A countries which are limited in Europe to: Germany, Denmark, the Netherlands, Sweden, Norway, and Luxembourg). This new EC borrowing will be reimbursed by national governments, which will have to raise additional national taxes or by additional borrowings (a national borrowing financing a European debt...) EU issuance would not reduce interest payments for national governments. In Italy, for ex., interest payments are three times annual military expenditure; but if an individual country doesn’t pay, who will pay for the service of the debt?

We, the EC, are going to borrow, in the name and with the support of European member states, we will borrow the necessary amount to finance military expenditure, tomorrow much needed social programmes, not to mention the huge green investments.

The ideology, behind this, is to always increase the power of the European Commission, which wants to manage everything, including the military, which is not and shall not be its prerogative. The military budget is, by definition, managed at the national level and at the international level, there is already an existing structure called NATO. No need to undermine it with another layer of bureaucracy that has no expertise in defense matters (a defence commissioner is useless).

We recall that the huge common debt raised by the Commission in 2020 ($230 bn) was considered as exceptional and unique (one-off) “Conviction is growing among investors that the EU bond issuance should become permanent” (S. Rao & A. Oyamada, 2024). It is now clear that it was the prelude of a series of new borrowings by the Commission to always uplift its power.


Yes, given the military threat from a dangerous dictator, European countries should increase their military spending (from less than 2% of their GDP to 3%). This cannot be done by tricks, but since there is no magic money, governments will have to restructure their spending from social programmes, civil-servants’ salary, reduction of green investment, towards more military spending. This is particularly painful for a country like France, which has one of the highest public and social expenditure ratios in the world and is unwilling to reduce it. The priority should (unfortunately) go from less social spending (in “social” expenses there are a lot of inefficient expenses), less environmental expenditure toward more investment and military expenditure. Not very popular, but we can no longer afford to leave military expenditure to a country that could be led tomorrow by a dangerous populist like Trump.


Needless to say, that the “European vision” of debt sharing within a common pool will appeal to irresponsible governments that prefer to make ambitious public announcements while hiding the fact that they have no money left and hope to mutualise public expenditure in the futile hope that it will be financed by someone else.

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