Nobel Laureate Economist Warns of Potential Federalization Over Joint Debt for Defense

Nobel Laureate Warns of Potential Federalization Over Joint Debt for Defense

Nobel laureate economist Thomas J. Sargent has shared his insights on the concerns of European countries regarding joint debt for defense. Sargent acknowledged the Northern European countries' reservations about assuming the obligations of their indebted peers. He drew parallels with historical resistance to shared debt, citing Pennsylvania's opposition in the late 1700s, and suggested that this could lead to a more federal form of government. European Union (EU) economy chief Paolo Gentiloni's proposal for a €100 billion fund and the issuance of common debt for the post-pandemic recovery program have reignited the debate.

Key Takeaways

• Thomas J. Sargent, Nobel prize-winning economist, warns of potential slippery slope to greater union if European countries issue common debt for defense.
• Wealthier Northern countries, like the Netherlands, worry they'll be responsible for indebted peers' liabilities.
• The "Hamilton moment" refers to the creation of the American federal government, altering the sovereignty of states.
• EU economy chief Gentiloni proposed a central treasury for pooled borrowing, facing resistance from countries like Germany and the Netherlands.
• The bloc already issued common debt for the NextGeneration EU program, agreeing it's a one-off measure, not a permanent shift.

Analysis

Sargent's warning sheds light on existing divisions and the possible consequences of joint debt for defense. This could potentially lead to a significant shift in the EU's dynamics, impacting national sovereignty and fiscal policy. The financial markets might react to heightened debt levels, affecting credit ratings and borrowing costs.

Furthermore, Germany's traditional wariness of joint debt will play a pivotal role in shaping the debate. While resistance to the proposal is expected, the success of the NextGeneration EU program's common debt issuance may pave the way for further exploration of joint debt mechanisms for defense. The EU's ability to manage stability and growth amidst these changes will be crucial for its future.

Did You Know?

• Common Debt for Defense: Refers to joint debt issuance for defense spending, which has encountered opposition from wealthier Northern countries like the Netherlands.
• Hamilton Moment: Describes the creation of the American federal government, implying potential federalization in the EU due to joint debt issuance.
• NextGeneration EU Program: The EU's post-pandemic recovery program, involving the issuance of common debt among member states as a one-off measure.