Bundesbank chief breaks with German orthodoxy to back permanent EU joint debt

For decades the Deutsche Bundesbank was the anchor of northern European resistance to joint EU borrowing. Its president, Joachim Nagel, has now broken that consensus. In an interview with Politico published on 11 February, Nagel argued that the European Union should issue joint debt on a permanent basis to create a liquid, euro-denominated safe asset capable of rivalling US Treasuries. The intervention places Germany's central bank in direct conflict with Chancellor Friedrich Merz, who has insisted that joint borrowing remain an emergency tool.

A historic reversal for the Bundesbank

The Bundesbank's opposition to mutualised debt has been a constant of European monetary politics since the Maastricht Treaty. During the sovereign debt crisis, the bank opposed the European Financial Stability Facility and later the European Stability Mechanism, arguing that mutualisation would weaken fiscal discipline. It acquiesced only to the €800 billion NextGenerationEU recovery instrument and a €90 billion loan to Ukraine, treating both as emergency exceptions. Nagel's predecessor, Jens Weidmann, resigned in 2021 partly over disagreement with the ECB's pandemic bond purchases, which he viewed as covert fiscal mutualisation.

Nagel's language in the interview was deliberate. "Tradition is something that is a reflection of the reality of the past," he said. "Now we have a different reality." He cited a security environment not seen since the Second World War, referring implicitly to Russia's war in Ukraine and the unpredictability of US foreign policy under President Donald Trump. The shift aligns the Bundesbank with the ECB's governing council, which Nagel said had "for the first time coalesced around support for joint debt" and sent EU leaders a wish-list of reforms to keep pace with the United States and China.

Collision course with the Chancellery

The timing is awkward for Berlin. Days before Nagel's interview, the German government publicly rebuffed President Emmanuel Macron's call for expanded eurobond issuance to finance artificial intelligence, European defence, semiconductors and robotics. Macron argued that global investors are growing nervous about the dollar and that Europe should offer an alternative. "The global market is more and more afraid of the American greenback," he told reporters on 9 February. "It's looking for alternatives. Let's offer it European debt."

Merz, who took office in May 2025, campaigned on a platform of fiscal rigour. His coalition agreement with the SPD and Greens commits to keeping the EU's joint borrowing capacity as a crisis instrument. A government spokesman said this week that "the federal government sees no need for a permanent eurobond instrument" and that "the existing instruments are sufficient." Nagel's intervention therefore creates a rare public split between Germany's monetary authority and its political executive. The Bundesbank is independent, but its president's views carry weight in a country where central bank credibility is treated as a constitutional asset.

Conditions and guardrails

Nagel was careful to frame his support with conditions that reflect traditional Bundesbank concerns. A European safe asset, he said, would only support "specific purposes," and governance, "how it is controlled by the European authorities and the Member States", must be "equally clear." He insisted that "European debt is not a free lunch" and that "doubts about fiscal sustainability should not jeopardize the chances for improved common policies." Joint issuance, in his view, must be accompanied by debt reduction at national level.

He declined to specify a target volume. "I won't give you a number," he said, but added that "if you want to create something liquid, you have to give the markets an indication about the volume that you will supply over a certain period of time and for a certain purpose." Market practitioners estimate that a benchmark European safe asset would require at least €500 billion of outstanding issuance to achieve the liquidity of US Treasuries, compared with roughly €400 billion currently outstanding from the EU's two main borrowing programmes, NextGenerationEU and the SURE unemployment scheme.

The capital markets dimension

Nagel's argument is not only geopolitical. He has long argued that Europe's fragmented capital markets handicap its economy. The EU's savings remain largely trapped within national borders, while companies rely heavily on bank lending rather than market finance. A deep, liquid market for a European safe asset would, in theory, anchor a broader capital markets union, giving pension funds and insurers a home-grown benchmark for long-term liabilities and lowering the cost of capital for European firms.

The ECB has been making a similar case. Lagarde has spoken since mid-2025 of a "global euro moment" as the dollar's share of global reserves has slipped below 58 per cent, its lowest in three decades. The ECB last week signalled it may expand its network of swap lines with non-euro-area central banks, ensuring euro liquidity in periods of stress. Nagel played down the political dimension: "I'm not in favor of fast tracking, jumping from one level to the next. Often, such a development is not a very healthy one. I'm comfortable with gradual progress on the international role of the euro, as long as it's moving in the right direction."

Payments independence and the digital euro

Nagel's interview ranged beyond borrowing. He warned that payment systems could be "weaponized" in extremis and argued that Europe must break the duopoly of Visa and Mastercard over cross-border card payments. The solution, in his view, is a digital euro, a central bank digital currency that would function as a virtual extension of euro banknotes and coins, settling transactions across the EU in seconds. The ECB is in the preparation phase for a digital euro, with a decision on issuance expected in late 2026 or 2027.

The link between a digital euro and capital markets union is strategic. If European payments run on US rails, Nagel argues, the continent's monetary sovereignty is incomplete. A digital euro would also give the ECB a direct transmission tool for monetary policy and reduce reliance on commercial bank deposits for settlement. Critics, including the European Banking Federation, warn that a poorly designed digital euro could disintermediate banks and trigger deposit flight in a crisis. Nagel acknowledged the tension but insisted the project is necessary for autonomy.

The political arithmetic

Nagel's intervention does not change the legal requirement for unanimity on new EU own resources or treaty change for a permanent borrowing capacity. The frugal bloc, historically the Netherlands, Austria, Finland and Denmark, often joined by Germany, has blocked previous attempts to expand joint borrowing beyond emergencies. Nagel's shift may soften Germany's stance, but Merz has shown no sign of moving. The Chancellor's room for manoeuvre is constrained by the FDP's presence in his coalition and by a Constitutional Court that has policed the boundaries of EU fiscal integration since the 2009 Lisbon judgment.

There is also the question of what "specific purposes" would qualify. Defence is the most obvious candidate. The European Commission has proposed a €1.5 billion defence industry programme, but member states have been reluctant to fund it through joint borrowing. Technology funding, semiconductors, AI, quantum, is another. The Chips Act, launched in 2023, has a budget of €43 billion, only a fraction of which is public money. Nagel's framework would require each programme to have a clear sunset clause and a dedicated revenue stream, likely from new EU own resources such as a carbon border adjustment mechanism or a digital levy.