A common European safe asset is still unlikely

Jul 30th 2026|4 min read

Germany’s chancellor, Friedrich Merz, flew to Dublin on July 28th just to hand-deliver a four-letter message: Nein. The recipient, Micheál Martin, his Irish counterpart, took over the rotating presidency of the Council of the European Union at the start of the month, and a new seven-year EU budget needs to be hammered out. Embattled at home, in part because of spending cuts and tax increases, Mr Merz insisted that the current proposal, around €1.7trn ($2trn), was unacceptable. “We need a budget draft that cuts across the board—to the tune of several hundred billion euros.”

The cuts have to be even larger if the EU also has to start repaying its debt. The bloc has issued €840bn (worth about 4.5% of GDP) in the past, mostly to back its post-pandemic recovery fund (see chart). Servicing and repaying that will take about €168bn out of the budget. The European Commission would like to add more debt, above what is already planned for a defence-loan programme and €90bn in help for Ukraine; it wants a debt-funded tool, worth over €300bn, to respond to unforeseen crises. Perhaps Mr Merz should consider the upside. A more debt-funded EU could help create a thriving market in European rather than national bonds.