Europe is still a long way from reaching a ‘Hamiltonian moment’. Alexander Hamilton – the first US Treasury secretary, serving from September 1789 to January 1795 – integrated the individual American states’ war debts into a single federal budget, which the federation then repaid. This was the price of freedom after the War of Independence with the British. Even after the increase in European fundraising after the Covid-19 pandemic in 2020, the European Union is far removed from that state of affairs.
This needs to be borne in mind in all future discussions on the shape and direction of the EU and its leading institutions, the Commission and the European Central Bank.
For a long time, Europe was unable to establish a federal-style community debt as Hamilton had done. However, since the Covid crisis, some observers have suggested that Europe now has reached a significant amount of common debt and that the ‘Hamiltonian moment’ has arrived.
What is the current situation?
EU common debt issuance has become substantial. A total of €800bn has been allocated for measures to boost productivity, climate action, digital transition and, most recently, the response to the energy crisis triggered by the war in Ukraine. This debt is conditional in that it is applied flexibly to national plans rather than to specific projects.
Its main objective is to allow member states deemed to be economically lagging to ‘catch up’ in terms of productivity.
Of all the Community funding programmes, the Next Generation EU debt programme has been by far the largest. This is financed through debt contracted on the market by the Commission in the form of EU bills and bonds, all with different maturities. EU debt rose from €50bn before the pandemic to €695 bn by mid-2025.
By the end of the process, the total amount of shared debt is expected to reach between €800bn and €950bn. But this is a long way behind US government debt of $55tn, of which $18tn is held by non-residents.
European and US debt not comparable
The two debt totals differ not only in their amount, but also in their fundamental characteristics. The US government is responsible for public debt issued in dollars. It is the sole authority in charge of servicing interest and principal repayments. There is no need for the government to negotiate with individual states.
European common debt is different. There is no unified European state as the natural guarantor of the debt issued by the Commission. The burden lies with the Commission itself, which is obliged to negotiate with member states to service and meet the maturities of the common debt.
In principle, the EU’s budget has to service these payments. This, however, assumes that the European budget is sufficient, or can be made sufficient, to finance the operations in question. Yet amending the European budget is no easy task. It is the result of political consensus that is difficult to achieve.
Among the components of EU debt, the part of NGEU that involves loans to member states is less problematic. Beneficiary states receive loans from the Commission. When these loans mature, the beneficiary states repay them. The loans received are with lower interest rate spreads than those normally applied to the various states. An element of Community solidarity applies, as the Commission allows member states with high spreads more favourable terms.
In the portion of the NGEU allocated in the form of grants, we see a still more significant redistributive mechanism. Grants are allocated to member states with low productivity. The major beneficiaries of the grants (Portugal, Italy, Greece and Spain) received 78% of the total grants, well above their share of the budget and of GDP (28%). So subsidies go to the less wealthy states, while the underlying debt financing is supplied by all states via the Community budget. The ‘good payers’ bear most of the cost. However, it is unclear whether this form of redistribution through the budget will be politically accepted.
Power versus negotiation
The comparison with the US can be formalised as follows: in the US, public debt depends on American power. Debt is a matter for the government. It does not need to be negotiated with the states. The US is a single state with a deep and unified financial market. In Europe, the Commission, the issuer of common debt, has to negotiate its financing.
Dollar-denominated US debt is ‘self-sustaining’, whereas European debt requires support in the form of budgetary agreements.
It is unrealistic to believe that that EU financing will somehow be ‘self-financed’ by NGEU-generated productivity gains. There is no evidence to suggest that the NGEU has increased productivity. The indications gathered so far are ambiguous and the future is very uncertain.
Anyone who believes that Europe is close to a Hamiltonian moment has fallen victim to self-delusion. In fact, despite diverse external pressures for the Europeans to become a more powerful strategic force in the world, we are still very far from the goal that some are trying to promote.
Jacques de Larosière is a former director of the French Treasury, managing director of the International Monetary Fund, governor of the Banque de France and president of the European Bank for Reconstruction and Development.
OMFIF will be joined by Jean-Claude Trichet, ECB president from 2003-11, Nathalie Romang, chair of the Reform Club’s Economics & Current Affairs group, and George Buckley, Society of Professional Economists chair, on 28 April to discuss why Europe needs a federation and how it can be accomplished.
Interested in this topic? Subscribe to OMFIF’s newsletter for more.