Policy Paper 255
 

European debt mutualisation

Finding a legitimate balance between solidarity and responsibility mechanisms

By Andreas Eisl, Research fellow, Jacques Delors Institute,
& Mattia Tomay, Political scientist, Member of the Académie Notre Europe 2019-2020.

|   15/07/2020             |   Andreas EISL   |   Mattia Tomay             |   Economie et finance
Policy Paper

Executive Summary ▪

In the upcoming European Council on July 17 and 18, EU member states will fight for a compromise on the European Commission’s main project to tackle the economic fallout of the Covid-19 crisis across Europe: a new 7-year EU budget propped up with a temporary Recovery Instrument (Next Generation EU) amounting to EUR 750 bn of jointly issued debt and to be passed on to EU countries as grants and loans. It is one of the most ambitious in a long line of proposals for European debt mutualisation.

While joint borrowing can carry a lot of advantages, debt mutualisation has always been very controversial. Confrontations between those countries supposedly benefiting and losing from mutualising debt have repeatedly centered on the legitimate balance of solidarity and responsibility that such debt implies. Democratic legitimacy in solidarity-responsibility arrangements can be achieved when they can deliver in terms of output legitimacy (being effective in economic terms), input legitimacy (ensuring sufficient room for domestic politics in deciding national policy trajectories) and throughput legitimacy (being run in a transparent and accountable manner).

This paper analyses the solidarity-responsibility arrangements of various proposals and realized forms of European debt mutualisation made over the last decades to evaluate their shortcomings and potential in finding a legitimate balance of solidarity and responsibility mechanisms for all EU member states. Based on this analysis, we make the following key recommendations for the ongoing negotiations on debt mutualisation for a European recovery after the Covid-19 crisis:

  • Negotiations in the European Council should not deviate from the model of a crisis specific mechanism for supranational borrowing that relies largely on grants for disbursement. A loans-based approach or an insufficient amount of grants would be harmful and fall short of the substantial macroeconomic stabilisation needed to weather the current crisis.
  • The mutualisation of debt repayment (based on grants rather than loans) justifies the inclusion of a certain degree of conditionality. Criteria for the granting and disbursement of funds should be concrete but should also leave sufficient room for countries to set their own policy priorities without excessively interfering with national sovereignty, as it was the case during the Great Recession.
  • The assessment process of national recovery and resilience plans financed by Next Generation EU should be transparent and allow for accountability. To guarantee legitimacy and democratic control, we maintain that the Commission is the best-placed institution to make decisions in this regard, subject to the appropriate review of both the Council and the European Parliament.