The article was first published on OMFIF on February 23th, 2026.

Otmar Issing, a former board member for economics at the Bundesbank and European Central Bank, is honorary president of the Center for financial Studies, Frankfurt. Jens Weidmann, a former Bundesbank president, is chairman of the supervisory board of Commerzbank.

Europe faces a new era in security policy. The Russian war of aggression against Ukraine and an unpredictable transatlantic partnership require a substantial and expensive strengthening of Europe’s defence capability. The call for joint European debt has therefore again become louder. Eurobonds appear to some as a quickly available instrument with symbolic power – a sign of European resolve in challenging times.

This issue has been debated at least since 2010. Joint European Union debt is viewed as an all-purpose weapon that seems suitable for every problem. It is seen variously as a method to calm markets, stimulate investments, lower energy prices, strengthen sovereignty and now finance defence. In the end, this is old wine in new bottles.

Strengthening European ability to act in a crisis requires clarification on decision-making and liability. Good decisions are made only by people who are liable for the consequences. This is one of the constituent principles of our market economy. And it also applies to state debt.

Competence over taxes and public spending is a basic right of sovereign states. In the European Union, these decisions remain national matters. If the EU were to finance member states through common bonds, they would no longer be fully responsible for the consequences of their decisions. But the fiscal baselines are highly divergent. This is all the more problematic as public debt is already high. In the euro area it stood at 89% of gross domestic product at the end of last year, 117% in France, 137% in Italy and 147% in Greece. Germany is still in the lower range with 63%.

Where interest rate differences reflect different pressures for reform, attempts to smooth out these variations weaken incentives for sound budget management. Implicit transfers between countries, not decided transparently in parliaments, would be the consequence. If, for example, the impression arises that raising the retirement age in one country finances early retirement in another, this undermines solidarity and can divide Europe.

Rising debt adds to burdens on states’ current budgets, especially if increased debt leads to higher interest rates. This puts pressure on central banks to keep interest rates as low as possible. If the central bank submits to this pressure, fiscal policy gains precedence over price stability and fiscal dominance prevails. That is why central banks should have an elementary interest in solid government finances as a condition for price stability.

Clearly, security policy can justify temporary debt expansion. The decisive factor is whether new funding actually flows into new defence capability – or whether it is misused to fill spending gaps elsewhere. Budgetary funds are politically substitutable. So politicians have incentives to use budgets in areas of greatest political return – not necessarily for the original purpose.

The German constitutional ‘debt brake’ exception for defence, decided in March 2025, illustrates the pitfalls. Germany spent around 1.3 % of GDP on defence before the exception, and the Nato target was 2%. Nevertheless, the threshold was set at 1%, opening potential for higher federal government spending in non-defence fields. Similar substitution effects are evident in European programmes. In the Next Generation EU reconstruction instrument, decided in 2020 in response to the Covid-19 pandemic, funds were partly used for long-planned projects, at most, loosely related to intended objectives.

In addition, there is no transparency in individual nations’ debt statistics on the obligations impinging on them from EU debts. This contravenes fundamental transparency requirements.

If common European debt for defence is not to undermine stability principles, conditions would be necessary that seem politically unrealistic to fulfil. European funds should be allocated only for clearly identified projects, approved by a European authority. The funds would need to be subject to permanent monitoring and control. Incorrect usage would have to lead immediately to cancellation and recovery of the money.

Another frequently heard argument for Eurobonds is detached from defence concerns. A major reason for what some regard as the euro’s unsatisfactory development as a reserve currency is said to be a lack of secure euro investment opportunities. With a massive issue of Eurobonds, European ‘safe assets’ could allegedly be made available quickly on a large scale.

But would additional debt be an appropriate way to create safe investments? German state bonds have hitherto been considered ‘safe assets’ because they are backed by German taxation power. The security of additional European debt would depend on national states’ repayment guarantees – thus affecting the sustainability of German public debt.

In view of rapidly and significantly increasing German national debt due to extensive ‘special funds’, there is only very limited scope for additional ‘safe’ European debts. Ultimately Eurobonds would be anything but ‘safe assets’. And this status would be lost for German bonds too.

True strength requires responsibility. Responsibility requires institutional coherence. Eurobonds to finance higher defence spending will strengthen the EU only if they are embedded in a fundamental reform that secures common decisions in this area and guarantees sustainable public finances through strict budgetary rules. The Stability and Growth Pact no longer meets these requirements, because it has been made far too flexible and is subsequently no longer recognisable. For all these reasons, under present conditions, Eurobonds are not the answer to Europe’s defence financing needs.