EU’s challenge in Ukraine starts with bonds

JD Vance participates in a bilateral meeting with German exterior minister Annalena Baerbock and German president Frank-Walter Steinmeier last week. (Source: Bloomberg/Getty Images Europe)

US Vice President JD Vance's abrupt address to the Munich Security Conference on Friday certainly rattled European cages. The European Union needs to come together, fast, for its own self-preservation. That will cost a lot of money, and happily there is an existing template from the pandemic: The NextGenerationEU €800 billion ($840 billion) bond-issuance platform. There's already been a lot of discussion about extending this somehow, both for defense or climate change.

Nothing in the EU is ever straightforward - but a solution is at hand if the existential urgency is there. Constitutional issues often get in the way, but if Germany could swallow the pandemic rescue plan surely other countries can get out of their own way now too. The EU’s saving grace has always been legal and budgetary flexibility when required. And there are some promising signs, with the likely next German chancellor, Friedrich Merz, expressing broad support for common defense bonds. It was a major topic at Monday's emergency defense summit in Paris that all the major European leaders attended, including some, like UK Prime Minister Keir Starmer, who didn't make it to Munich.

While the number doesn’t need to be as big as the Covid-era fund, it's still going to have to be in the order of €500 billion over time and of a permanent nature.

As an additional kicker, if any future defense euro bonds were broadly fungible with the €630 billion outstanding EU Commission debt then it could transform into a liquid market from its current sleepy supranational credit format, as I have argued repeatedly. Win-win. The big mistake to avoid would be to spin any new debt issuance off into separate silos, such as the euro-crisis bailout vehicle European Stability Mechanism, which would further complicate the EU's debt offerings. Keep it simple, stupid.

We are quite a long way down this road, with the Centre for European Reform's research papers on how defense bonds could work and lead towards a proper defense union - which surely has to be the end goal. Former European Central Bank President Mario Draghi's repeated paeans for a major push towards federalism have centered on the EU's lack of competitiveness - but the defense funds would be all out of the same pot.

Keeping control nominally at the nation-state level is possible even with an another undeniable step toward having centrally issued EU-wide debt. Urgency alone would predicate this isn't the time to cross the Rubicon on "joint and several" liability, which in plain English means Germany remains only on the hook for its own share of the EU's debt pile but not everyone else's. Still, keeping Draghi quiet on this subject is going to get even harder.

As Lenin observed “There are decades where nothing happens, and there are weeks where decades happen.” Something needs to come out of this sudden push to end the Ukraine war and upend the cozy European security consensus in the process. Increased debt is pretty much always the answer to the EU's travails. The solution is right in front of its politicians if they can all pick it up together.

Credit: Bloomberg