The eurozone is facing unprecedented challenges requiring substantial public investment. Russia’s full-scale invasion of Ukraine has forced EU member states to ramp up defense spending, while U.S. tariffs weigh heavily on European exporters — particularly Germany, historically a growth driver. Additional pressure from climate change and migration only adds to the bloc’s budgetary strain, reports Baltimore Chronicle.
The core issue lies in the limited fiscal capacity of heavily indebted nations — chiefly Italy, Spain, and increasingly France. These countries have accumulated such high levels of public debt that they lack the flexibility to fund new collective initiatives. As a result, calls are growing louder for issuing joint EU debt instruments — or eurobonds — to finance defense expenditures. This would, in effect, shift part of the fiscal burden off national budgets.
A precedent already exists. During the COVID-19 pandemic, the EU approved a one-off €750 billion recovery package funded through joint debt issuance. Much of that spending was redirected to high-debt countries like Italy, Spain, and Greece. Today’s defense-financing proposals aim to make such joint borrowing permanent, arguing that defense is a “public good” benefiting all EU states.
These proposals, however, come with major drawbacks. First, since funds are fungible, they reduce pressure on debtor countries to engage in meaningful fiscal consolidation. Second, the measures don’t create new fiscal space — they simply redistribute it from low-debt countries like Germany and the Netherlands to high-debt ones. Third, such moves remain unpopular in fiscally conservative states, where voters suspect the South is attempting to tap into Northern Europe’s budgetary reserves.
For nearly two decades, the eurozone has been gridlocked over how to handle sovereign debt. Two extreme solutions exist, though both are politically unviable. One is a full fiscal union — but surging populist movements in Northern Europe have made that a nonstarter. The other is a return to national currencies, which would expand fiscal flexibility for indebted nations via currency devaluation. However, such a scenario carries destabilizing economic risks.
This leaves the eurozone in a grey zone. Joint debt for specific expenses like defense, or periodic European Central Bank interventions to contain bond yields in countries like Italy and Spain (as seen in 2022), are symptomatic of the current stagnation. These measures are far from ideal and remain politically toxic in Northern Europe, where they risk triggering populist backlash.
Yet a viable path remains. Southern countries could expand their own fiscal capacity — without external aid — by leveraging existing private wealth. According to ECB data from December 2024, median household net wealth in Spain (marked in blue on the chart) has surged in recent years, now exceeding Germany’s (black line) by over 60%. Italy (red line) also shows significantly higher household wealth.
This suggests a clear alternative: countries like Italy and Spain could introduce targeted wealth taxes to fund public debt reduction. If properly structured to shield low-income households, such measures could drastically improve investor confidence. Even a modest wealth tax would send a strong signal to financial markets that these nations are serious about addressing their debt burdens. Since much of the private wealth is tied to real estate, the risk of capital flight is minimal.
The only way out of the eurozone’s debt impasse is not further reliance on collective borrowing. Instead, indebted nations must begin converting a portion of their vast private capital into sovereign debt reduction. This would expand overall fiscal space, gain favor in the North, and eventually pave the way for broader EU financial integration. Crucially, with Putin’s war in Ukraine still raging, countries with high debt must confront the reality: the solution to their fiscal crisis lies in their own hands.
Earlier we wrote that regional inflation in the eurozone fell to 2.3%.