The silent debt union – rules without consequences: How Europe secretly created Eurobonds and who pays the bill

France's gigantic mountain of debt: Is the Eurozone facing another crash?

Maastricht was yesterday: How the EU is outsmarting its own debt rules

The European Monetary Union was once built on a strict foundation: fiscal discipline, financial self-reliance, and a clear contractual prohibition on debt mutualization were intended to make the euro a reliable, strong currency. But three decades after the signing of the Maastricht Treaty, the reality looks drastically different. The former stability union has gradually, and often unnoticed by the general public, become a de facto debt and transfer union. This creeping paradigm shift is putting the economic and political foundations of Europe to a severe test.

Driven by successive crises – from the global financial crisis to the euro bailout and the COVID-19 pandemic – fiscal red lines have been continually pushed further and further. Instruments such as the debt-financed NextGenerationEU recovery program or the unprecedented bond-buying programs of the European Central Bank (ECB) have created an architecture of tacit mutual liability. What was once considered an absolute political taboo has long since become reality through linguistic reinterpretations and technical mechanisms.

The consequences of this policy are massive and highly unevenly distributed across Europe. While heavily indebted countries like France and Italy benefit from artificially low interest rates and relaxed deficit rules, the citizens of other countries bear the hidden costs. Through financial repression, inflation, and years of negative interest rates, the burden of national debt reduction has effectively been shifted onto savers – a process that has resulted in a massive loss of purchasing power, particularly for German savers with low returns. At the same time, an invisible, multi-billion-euro liability risk is building up deep within the European payment system TARGET2, which could materialize in the event of a political crisis.

This article analyzes the profound mechanisms of this covert debt mutualization. It examines the systematic erosion of European fiscal rules, Germany's ambivalent role as both net contributor and beneficiary of interest rate policy, and the pressing question: Can the Eurozone's risky game of implicit liability succeed without a return to genuine fiscal discipline, or is the common currency threatened with a fundamental loss of confidence in the long term?

The risky euro trick: Why joint eurobonds are already a reality

Inflation trick and transfer policy: When solidarity becomes a systemic issue and

When the architects of the Maastricht Treaty laid down the fiscal rules of the future monetary union in 1992, the principles seemed clear and non-negotiable: No member state could have an annual budget deficit exceeding three percent of its gross domestic product, and total debt had to be kept below the 60 percent threshold of GDP. These limits were intended to prevent what economists call "moral hazard": the exploitation of a common currency to accumulate debt at the expense of fiscally disciplined partners without having to fear the corresponding risk premiums in the capital markets. Three decades later, these intentions have become a historical footnote.

France, the eurozone's second-largest economy, posted a budget deficit of 5.8 percent of GDP in 2024 – the second-highest deficit of all EU member states. French debt reached 113.2 percent of GDP at the end of 2024, equivalent to a nominal debt volume of over €3.3 trillion. By 2025, the ratio had climbed further to 115.6 percent. For comparison, the EU debt rule allows a maximum of 60 percent. France exceeds this limit by almost double – and has never adjusted it, even during economically prosperous years. Only Greece, at 154.2 percent, and Italy, at 134.9 percent, had higher debt ratios at the end of 2024.

Germany, on the other hand, kept its debt-to-GDP ratio just above the Maastricht threshold at 62.2 percent. The deficit in 2024 was 2.7 percent – ​​within the permitted limits. The divergent development of the two economies not only reflects different fiscal strategies but also the fundamental dilemma of the Eurozone: A common currency lacks a mechanism that can enforce fiscal discipline sustainably without simultaneously having a politically and socially destabilizing effect.

From exception to rule: The slow erosion of fiscal principles

The path from the Maastricht ideals to today's reality was not an abrupt break, but a gradual process of erosion, accelerated by every major crisis of the past two decades. As early as 2003, the EU opened an excessive deficit procedure against Germany and France – but instead of imposing sanctions, the EU Council, under pressure from Germany and France, effectively suspended the procedure. This precedent had far-reaching consequences: it signaled that the large member states could relax the rules as needed.

The 2008 financial crisis and the subsequent European sovereign debt crisis between 2010 and 2012 then revealed the true architecture of the system. When Greece, Ireland, Portugal, Spain, and Cyprus were caught in the maelstrom of the refinancing crisis, it became clear that the Eurozone had been designed without a mechanism for orderly sovereign insolvencies. The political will to preserve the system led to a series of measures that de facto expanded mutual liability—without explicitly declaring it. The European Stability Mechanism (ESM), the European Financial Stability Mechanism (EFSM), and the provisional EFSF created guarantee frameworks that bound Germany and other net contributors to liability for foreign sovereign debt.

The reform discussions that triggered all these crises led to a revision of the Stability and Growth Pact in 2024, which critics interpret as a further weakening of the already laxly applied rules. The core of the reform: highly indebted countries now have up to seven years to reduce their deficit below the three percent threshold, instead of the previous shorter deadlines. This reform did not eliminate the system's structural weaknesses, but rather preserved them under the label of "flexibility and growth-friendliness.".

NextGenerationEU: The hidden birth of Eurobonds

The real qualitative leap in the history of European debt mutualization occurred in May 2020, in the midst of the COVID-19 pandemic. The European Commission presented the NextGenerationEU (NGEU) program, with a volume of €750 billion – the most unprecedented fiscal instrument in the history of European integration. For the first time, the European Union issued joint debt securities on the capital markets on a large scale, backed by collective guarantees from all member states. What the co-founders of the euro would have considered a red line in the 1990s – joint bonds for which all member states are jointly liable – had become political reality within a few weeks.

By the beginning of 2024, the European Commission had already issued EU bonds worth over €310 billion, of which over €220 billion were disbursed directly to member states under the Recovery and Resilience Facility. Repayment of this debt is planned until 2058 and is to be covered by newly introduced EU own revenue sources – so-called own resources. Whether these own resources are actually politically feasible and sufficient remains the central open question.

Critical economists like Friedrich Heinemann from the ZEW pointed out early on that the economic downturn caused by the pandemic had already been overcome when the majority of the NGEU funds had not yet been disbursed. The transfer component of the program—where grants do not have to be repaid—has a redistributive effect that is structurally permanent. The largest net recipients under the NGEU program are Spain and Portugal; the largest net contributors are Luxembourg, Sweden, and Austria. Germany improved its net position in NGEU even more than any other member state, due in part to the favorable calculation method.

The semantic embellishment should not be underestimated: What is economically equivalent to a Eurobond issuance – joint liability for jointly incurred debt – was politically marketed as a temporary crisis measure. The linguistic construction as an "instrument" rather than a permanent mechanism is intended to keep the institutional threshold low and prevent prejudgment for future debt mutualizations. In fact, however, this threshold has already been crossed.

The ECB as a silent guarantor: The Transmission Protection Instrument and its implications

Parallel to the fiscal dimension, a second mechanism of implicit debt mutualization unfolded at the monetary policy level, one that is hardly less significant in its implications. On July 26, 2012, Mario Draghi delivered his now-legendary speech in London: The ECB would do whatever it takes to preserve the euro. The phrase "whatever it takes" ended the acute phase of the European sovereign debt crisis within hours. Behind this statement lay the implicit guarantee that the ECB would, if necessary, act as the buyer of last resort for the sovereign bonds of vulnerable member states—a function not provided for in the ECB's founding statutes and one that has since been the subject of several hearings before the German Federal Constitutional Court.

This implicit guarantee was formalized in 2022 with the Transmission Protection Instrument (TPI). The ECB Governing Council unanimously adopted the TPI on 21 July 2022, thereby authorizing itself to selectively and, in principle, without limit, purchase government bonds of individual euro area countries if, in the ECB's assessment, interest rate spreads have risen above an economically justified level. The volume of these purchases is explicitly not limited in advance.

The TPI is remarkable for several reasons. First, it effectively acts as a monetary policy backstop for the fiscal policies of highly indebted member states – a task prohibited under the original understanding of the EU Treaty. Article 123 of the TFEU (Treaty on the Functioning of the European Union) explicitly forbids the ECB from monetary financing of governments. Second, the activation criteria are deliberately vague: they include compliance with the EU fiscal framework and the “sustainability of debt development” – criteria by which the ECB itself acts as the judge of its own activation. Third, the TPI establishes an asymmetry: the default risk of jointly purchased bonds ultimately lies with the German taxpayer via the capital key, while the power to decide on activation remains with the ECB.

Critics like Friedrich Heinemann see this as a structural distortion: Bond markets rely on the ECB to buy French government bonds to stabilize the spreads should they rise too sharply. This expectation artificially keeps risk premiums for highly indebted countries low, allowing them financing conditions that their fundamental creditworthiness would not justify. The TPI is thus a monetary policy instrument that ultimately has fiscal consequences – and represents an implicit form of mutualized liability.

Financial repression: The invisible tax on thrift

Besides the institutional debt mutualization through NGEU and TPI, a third, more subtle mechanism exists through which the debt burden is de facto transferred to creditors – primarily savers: financial repression. This involves the deliberate, or at least accepted, practice of keeping nominal interest rates below the inflation rate, causing government bonds and savings deposits to lose real value.

In the eurozone, this phenomenon became structurally normal between 2012 and 2022 due to the ECB's zero-interest-rate policy. The consequences are strikingly documented: According to calculations by the German Federal Ministry of Finance, the German federal budget alone saved €162 billion in interest payments since the outbreak of the financial crisis in 2008 due to the ECB's low-interest-rate policy – ​​according to calculations by the Bundesbank, even up to €294 billion. German savers missed out on net interest income of around €199 billion during the same period, according to calculations by DZ Bank. By 2025, German savers are estimated to have lost €40 billion annually due to interest rates below the rate of inflation; across the entire eurozone, the corresponding losses amount to around €115 billion.

The direction of this financial repression is not accidental. In a monetary union with structurally different savings rates, it primarily affects the countries and population groups that hold comparatively high savings in the form of bank deposits – and these are disproportionately Germans and Austrians. Countries with high public debt and comparatively low private savings rates, on the other hand, benefited doubly: from the more favorable refinancing conditions for the state and from the lower real interest burden. The ECB's negative interest rates proved to be a veritable redistribution mechanism between Northern and Southern Europe: While German banks recorded net losses of over one billion euros due to negative interest rates in 2020, Italian banks achieved a net profit of 1.6 billion euros.

A Bundesbank study from 2024 approaches the topic with academic nuance, showing that financial repression can, under certain circumstances, even lead to a net increase in the national debt ratio because it dampens private investment and thus weakens economic growth, on which the debt ratio is based. The short-term relief effect for over-indebted public budgets can therefore be counterproductive in the long run – a finding that fundamentally calls into question the logic of purely debt-management policy approaches.

The TARGET2 system: Hidden liability in payment transactions

Another, often underestimated mechanism of implicit debt mutualization lies hidden in the Eurozone's technical payment system. The TARGET2 system (Trans-European Automated Real-time Gross Settlement Express Transfer System 2) processes all cross-border payments between Eurozone central banks. The resulting balances – claims and liabilities of national central banks to the ECB – have risen to historic levels in recent years.

The German Bundesbank temporarily reported TARGET2 claims exceeding one trillion euros. The increase in these balances is largely attributable to the ECB's bond-buying programs: when the ECB purchases bonds through the Eurosystem, the central bank money often flows through accounts at the Bundesbank, thus increasing its claims against the ECB. For Germany, this means that the Bundesbank is the largest creditor in the TARGET2 system, while the central banks of Spain and Italy had the highest liabilities.

These balances would pose a risk should a country with a negative balance leave the monetary union: A corresponding claim by the ECB against the central bank in question would then remain, and if this claim could not be fully settled, the ECB would have to report a loss, which would be distributed proportionally according to the capital key. This scenario is not theoretical, but rather the monetary policy and institutional nervous system of the eurozone – and it reflects, in condensed form, the fundamental problem of trust: The stability of the system depends on no one leaving.

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France's structural dilemma: An economy on credit

France exemplifies the dilemma of highly indebted Eurozone members. No other EU member has such high levels of national debt in absolute terms: over €3.3 trillion at the end of 2024, and €3.46 trillion in the third quarter of 2025. Under President Macron alone, national debt has increased by approximately €1 trillion since 2017. In just two decades, French national debt has tripled.

What makes these figures particularly worrying is the lack of a corrective mechanism during good times. While Germany gradually reduced its debt-to-GDP ratio from over 80 percent to below 70 percent after the financial crisis, France remained at a high level. The difference lies not in a lack of growth phases, but in the structural spending dynamics of a welfare system that absorbs roughly 57 percent of GDP into government spending – the highest rate among all major economies in the Eurozone. France now has to make annual interest payments of around 67 billion euros, money that is then lacking for other government functions.

The political dimension exacerbates the problem. Every time austerity measures are on the agenda, both left- and right-wing parties in France vociferously mobilize their opposition. Despite all the announcements, the deficit of 5.8 percent of GDP in 2024 and 5.1 percent in 2025 remained well above the EU limit. The budgetary path to which Paris committed itself to the European Commission—reducing the deficit to three percent by 2029—is considered unrealistic by economists if economic growth stagnates and political instability persists. This path relies on a politically unfeasible combination of spending cuts and tax increases.

The Centre for European Policy (cep) identified the divergence in debt ratios between Germany and France as a systemic risk for the eurozone early on. When the two largest economies in the monetary union have structurally different fiscal starting points, they inevitably pursue different economic policy objectives – for example, regarding how strictly EU fiscal rules should be applied, whether new joint debt should be issued, or how the ECB's monetary policy should be oriented.

The reform of the Stability Pact: Flexibility as a systemic risk

The reform of the Stability and Growth Pact, which entered into force on April 30, 2024, represents a pivotal turning point in the history of European debt architecture. On paper, the reform was intended to strengthen budgetary discipline while simultaneously allowing greater flexibility for investment and growth. In practice, it primarily means one thing: the deadlines for highly indebted states have been extended, the requirements individualized, and the binding nature of sanctions further weakened.

The core element of the new rules is the country-specific adaptation of consolidation pathways: Instead of uniform requirements for all, individual multi-year plans are now agreed upon, based on the respective economic circumstances. This sounds reasonable, but harbors a fundamental problem: The more individualized the rules, the weaker their disciplinary effect. Countries with strong negotiating power and political clout – such as France – can de facto negotiate conditions that grant them more time and leeway. The result is not more fairness, but more discretion.

Despite France's chronic rule violations, the EU Commission has repeatedly turned a blind eye – partly out of concern about boosting populist forces, as experts like Heinemann criticize. This political deference is the real systemic problem: a set of rules that only applies to large economies to a limited extent loses its credibility. And without credibility, it cannot fulfill its purpose – safeguarding price stability and fiscal soundness in the Eurozone.

Germany between burden-sharing and interest politics

Germany's role in this system is more contradictory than public debate often portrays it. On the one hand, Germany is the largest net contributor to the EU budget: In 2024, German EU payments exceeded payments by €13.1 billion. With €157 per capita, Germany leads all EU member states in net per capita payments. On the other hand, Germany itself has benefited considerably from the ECB's low interest rates: According to calculations by the Federal Ministry of Finance, the German federal budget has saved at least €162 billion in interest payments since 2008 thanks to this low-interest-rate policy.

This dual position makes Germany's role in the European budget debate structurally ambivalent. The political rhetoric of fiscal discipline and the Maastricht rules is more credible when one's own debt level remains comparatively low. At the same time, Germany was for a long time one of the biggest beneficiaries of the ECB policy that allowed other countries to finance their deficits cheaply. Public outrage over over-indebted southern Europeans sometimes overlooks the fact that the monetary policy environment that enabled this debt also significantly relieved the burden on the German national budget.

Added to this is the TARGET2 dilemma. The Bundesbank holds the largest claims in the system – claims that, in the hypothetical event of a highly indebted country leaving the euro, would entail considerable potential losses. Germany is thus both the largest net contributor to the EU budget and the de facto largest implicit creditor in the eurozone payment system. This dual role is a consequence of its economic strength, which positions Germany at the center of a liability network that was largely established without its explicit consent.

The implicit liability union: What officially does not exist, but is effective in practice

The paradox of the Eurozone can be summed up in one sentence: there is officially no debt union, but de facto it functions like one. The combination of NGEU bonds, ECB purchase programs (APP and PEPP), the TPI backstop, TARGET2 balances, and the ECB's political "whatever it takes" has created an architecture of implicit mutual liability that, in its effect, comes close to a formal debt union – without possessing its democratic legitimacy and legal transparency.

The crucial difference to explicit Eurobonds lies not in the risk sharing, but in the visibility. Explicit Eurobonds would be debated in national parliaments, reviewed by constitutional courts, and legitimized through democratic processes. The implicit debt union, on the other hand, arose through technical measures by the ECB, through institutional and legal constructs by the EU Commission, and through political decisions made in moments of crisis, when the rhetoric of "no alternative" overwhelmed democratic objections.

The ECB's asset purchase program (APP) and the pandemic emergency purchase program (PEPP) together reached volumes of several trillion euros. While the ECB has announced its intention to reduce these portfolios to zero, the structural effect of highly indebted countries benefiting for years from artificially compressed spreads is irreversible. The mountains of government debt accumulated during this period remain.

Who pays, who wins: The distribution logic of the silent transfer union

The question of who benefits from the implicit mutualization of debt and who pays for it can be answered on several levels. At the member state level, the winners are those with structurally high public debt, unstable public finances, and limited access to capital markets at market-based interest rates: Italy, France, Spain, and, at times, Greece. These countries received financing conditions through the ECB's asset purchase programs that did not reflect their actual risk profile. At the level of net contributors, Germany is the biggest structural loser, measured by budget contributions, TARGET2 claims, and the implicit liability risk.

At the household level, the picture shifts: German savers pay above-average costs for the low-interest-rate policy because, compared to other Europeans, they save a disproportionately large amount in bank deposits. At the same time, German property owners and stock investors also benefit from the asset price inflation induced by the ECB. Financial repression, therefore, does not affect all Germans equally – it is primarily a redistribution of wealth from interest-rate-sensitive savers to holders of tangible assets and to highly indebted states.

The real systemic winner, however, is not a single country, but the principle of progressive integration itself. Every crisis has created new dependencies, new mechanisms of solidarity, and new liability pools – making a return to national monetary sovereignty increasingly unlikely, both politically and economically. Debt mutualization is therefore not an end in itself, but a method: it serves to preserve the common currency and thus the continued existence of the European integration project.

The unresolved core problem: stability without discipline

The fundamental tension within the Eurozone is not new, but it is more acute than ever: A monetary union without a fiscal union can only remain stable in the long term if all members voluntarily maintain fiscal discipline. As long as individual members know that they will be protected by the ECB and common instruments if necessary, the incentives for voluntary consolidation are weak. This core problem – known in economics as "moral hazard" – has not been resolved by any of the institutional reforms implemented so far.

The answer to this dilemma can theoretically go in two directions: Either the implicit liability relationships are made explicit, democratically legitimized, and supplemented by genuine fiscal capacity—which amounts to a complete fiscal and policy union. Or truly effective sanction mechanisms are established that also work for large countries and automatically correct fiscal imbalances without allowing political discretion to undermine the rules. Both paths require a political will that is currently not evident in the national discourses of the eurozone members.

What remains is what has characterized the Eurozone since its inception: a system that, in times of crisis, always opts for technical and institutional escalation without subsequently developing the necessary democratic and legal framework. The implicit debt union exists. However, its explicit recognition is the political taboo that holds the Eurozone together—and simultaneously remains its deepest vulnerability.

Scenarios for the Eurozone: Between deepening and loss of confidence

The viability of the current arrangement ultimately depends on two variables: the confidence of the capital markets and the political coherence of the member states. Both are currently under pressure. Interest rate spreads for French bonds versus German Bunds have risen to levels not seen for 16 years. Political instability in Paris—with minority governments, confidence votes, and unresolved budget disputes—is making the markets nervous.

The structural problem is less the acute liquidity crisis than the long-term solvency issue. France has committed to reducing its deficit to three percent by 2029 – a path that requires significant spending cuts, for which there is no majority in the current political landscape. Should this target be missed, the European Commission and the ECB Governing Council will face a familiar choice: to weaken the rules or to risk political destabilization of one of the Union's largest economies.

The eurozone's confidence problem is therefore structural: the monetary union rests on the expectation of its members to behave in accordance with the rules – and on the tacit expectation that institutional backstops will intervene if this expectation is disappointed. As long as both expectations are simultaneously anchored in the market, the system is stable. However, if one of these expectations is shaken – for example, by a serious legal dispute over the TPI, a political crisis in France, or another global recession – the implicit debt union can very quickly transform into an explicit crisis.

The history of the Eurozone is the story of institutional innovation through crisis management. What is missing is an honest public debate about what model the Eurozone actually wants to be: an anchor of stability with real rules, a political union with genuine solidarity – or another decade of creative muddling through at the expense of those who save without benefiting.