Eurobonds and the inconspicuous path to fiscal union. Have we gone too far?

The dream of a carbon-neutral Europe is understandable—and, in its own way, noble. From the outset, however, it has remained the dream of a few idealists who underestimated the complexity of the world.

We all want to breathe clean air and live in an environment that does not destroy our own future. But Europe is not an island. The real fight against emissions would only make sense if the entire planet joined in, especially those who emit the most: China, India, and the United States. Moreover, the European Union is not doing so badly, which is why its efforts should be directed toward diplomacy rather than further internal regulations.

The second reason for doubt, however, is less technical and more moral: the representatives of the Union themselves. Those who preach moderation fly around Europe as if airplanes were taxis, and the entire European Parliament moves to Strasbourg several times a year—an ecological paradox that would make even a cynic laugh.

French engineer and climatologist Jean-Marc Jancovici points out that the real fight against the climate crisis takes place at the level of personal modesty and discipline. However, European politicians are known more for their pompousness than their ascetic lifestyle. That is why it makes sense to follow the money trail – perhaps it will show us better than speeches what motivation really lies behind Europe's "fight for the planet."

Financing the Union: nation states under pressure

The European Union is not (yet) a federal state, but still a community of nation states. However, since its inception, questions have been raised about how it is financed. To simplify: the European Union had two significant sources of funding – contributions from nation states, which make up 65 to 70 percent of the budget, and VAT revenues, which account for around 10 percent.

This means that the EU was primarily dependent on how much the rich states contributed to the common budget. In the beginning, these contributions were not such a big problem because the European states' debt was lower. In addition, most of the political representatives in these countries had a simpler situation.

It was much easier to defend pro-EU policies in 2002 than it is today. Across the EU, parties that want to change how it works and limit Brussels' power are gaining strength. Even parties that support the European Union are not having an easy time. An example is France, which in 2017 contributed €18.1 billion to the running of the Union.

In 2023, however, its contribution amounted to €27.2 billion. For France, which is drowning in debt, contributing to the common budget is therefore very burdensome. No wonder ordinary French people don't like it.

Eurobonds: Covid as a pretext

The European Union needed to find an additional source of revenue that would be independent of the will of nation states. This source of revenue automatically increases Brussels' autonomy. Covid was a welcome opportunity. It crippled the European economy.

Brussels wanted to solve this problem with the NextGenerationEU program, approved in 2020. This allowed for the issuance of joint European bonds worth €750 billion. The official reason for issuing the bonds was that these new European bonds would be lent at a very low interest rate, lower than individual states would borrow.

This is true to a certain extent. The first bond issue (ten-year) in June 2021 had a yield of 0.09 percent. However, bonds issued in 2023 already have a much higher interest rate, exceeding three percent. The debt did not help heavily indebted countries such as France to avoid falling further into debt crisis. Eurobonds have therefore failed to provide significant relief to nation states.

However, the very principle behind them also provoked opposition. Several citizens' initiatives and economists criticized the NextGenerationEU model before the Constitutional Court, arguing that joint European debt was a step towards fiscal union outside the scope of the EU's powers. Their lawsuit was unsuccessful.

The German Constitutional Court ruled that this step by the EU was acceptable. However, it added that it is only permitted in exceptional circumstances. Any further repetition without exceptional circumstances could be controversial.

The issue of Eurobonds will be revisited in connection with the development of European defense. However, this event is not in itself extraordinary or unpredictable, as the EU has been actively involved in Ukraine. The consequences of this step are therefore not unexpected.

Green quotas and Brussels profits

However, Eurobonds have brought about one major change. The next step was the introduction of new own resources in December 2021 to ensure the repayment of joint European bonds from the NextGenerationEU program.

The European Union retains 25 percent of the total revenue from emission quotas, while the rest (75 percent) remains with the member states. However, this quarter alone represents huge sums – between 2021 and 2023, Brussels collected approximately €55 to €60 billion, which became one of the main sources for repaying European debt.

More money will flow into Brussels with the introduction of ETS 2 quotas. As it is difficult to estimate how the price of these quotas will actually develop, at the lower end of the price estimates, the sale should generate at least €300 billion over six years. Of this, a portion – in the order of tens of billions of euros – should go directly to the EU.

To sum up, Brussels has profited the most from the entire history of the introduction of Eurobonds. On the one hand, it has increased its own resources, so it is now less dependent on contributions from national states. At the same time, it has shown that, thanks to debt, it will be difficult to find a way back from the introduction of quotas.

Countries that would like to withdraw will have to find an answer to a very difficult question: where will they get the money to repay the joint bonds? In addition, national states will also receive their share from the sale of ETS 2 quotas.

Abandoning the entire system would therefore be a double blow: rejecting money from Brussels and finding the means to repay the debt. The whole mechanism thus deepens what is called "more Europe" in Brussels, but which in reality means less control by voters. The democratic deficit is hidden behind green rhetoric, while joint debts are slowly turning member states into debtors who can no longer leave freely—even if they wanted to.

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