Introduction
Alfred Kammer, head of the European Department at the International Monetary Fund (IMF), has suggested that the European Union (EU) should jointly borrow to finance public goods such as defense, research and development, and energy. This move would benefit the 27 EU countries and their collective 450 million citizens.
Controversial Joint Debt
The idea of joint debt among EU countries is highly contentious. Germany, the largest economy in the bloc, is particularly sensitive to joint debt, with several other northern European countries also opposing it.
The EU broke the taboo in 2020 by collectively borrowing €800 billion to relaunch the European economy post-COVID-19 pandemic. The possibility of further joint borrowing, though still highly challenging, has been a topic of public debate since then.
Increased Need for Public Spending
The threat of a Russian attack on Europe has dramatically heightened the need for defense spending. Additionally, competition from China and the US has increased pressure to drive European innovation and lower energy prices.
IMF’s Proposal
Kammer specifically recommends more than doubling the EU’s spending on these public goods, increasing it from 0.4% of Gross National Income to 0.9%. This equates to roughly €100 billion.
He further suggests financing this budget increase for the EU with common debt to pay for these European goods, as they are indispensable.
Existing Joint Defense Projects
The EU already has joint defense projects, funded collectively through the EU’s €150 billion low-cost loan program. However, more funds are likely needed given the substantial investment required for defense.
Key Questions and Answers
- What public goods is the IMF referring to? The IMF is referring to defense, research and development, and energy as public goods that the EU should jointly finance.
- Why is joint borrowing controversial? Joint borrowing is controversial due to the sensitivity of larger economies like Germany and opposition from several northern European countries.
- What events have increased the need for public spending? The threat of a Russian attack and competition from China and the US have heightened the need for defense spending and driving European innovation while lowering energy prices.
- What is the IMF’s proposed budget increase? The IMF proposes more than doubling the EU’s spending on public goods, increasing it from 0.4% of Gross National Income to 0.9%, which equates to approximately €100 billion.
- How does the EU currently finance joint defense projects? The EU currently finances joint defense projects through its €150 billion low-cost loan program, though more funds may be needed for substantial defense investments.
