The Credit Position of Eurozone Members Contingent on Well-Calibrated Fiscal Policies

Since the establishment of the Economic and Monetary Union (EMU) in 1999, the fates of European economies have been intertwined. After a decade of so-called convergence (at least in terms of bond yields), the Great Financial Crisis of 2008 affected eurozone members in different ways. Some countries (e.g., Estonia, Germany, and Finland) showed remarkable resilience, while others (e.g., Cyprus and Greece) defaulted. Yet, the most noteworthy developments observed in the early 2010s were the unconventional monetary policy implemented by the European Central Bank (ECB) and the financial assistance the European Stability Mechanism provided to several distressed economies. These pragmatic measures saved the EMU and then contributed to bringing down sovereign bond yields to historically low levels in the late 2010s. However, eurozone members have faced financial challenges since 2020. The COVID-19 pandemic, the Russian invasion of Ukraine, and D. Trump&s;s protectionism have disrupted global value chains and unleashed inflation, which left the ECB little choice but to increase its interest rates in 2022–2023. Despite the rate cuts observed since mid-2024, the monetary environment remains adverse as the borrowing needs of eurozone members are reaching an all-time high, driven by the green transition and the surge in military expenditures. This chapter argues that eurozone countries can no longer rely on the ECB to preserve their credit position, as they did in the 2010s. First, inflation may persist longer than expected, which would deter the ECB from cutting interest rates significantly. Second, an excessively accommodative monetary stance raises legal questions, especially in light of the Treaty on the Functioning of the European Union. As a result, fiscal consolidation is crucial to keep public debts sustainable and prevent the default of eurozone members. This implies ambitious policies to rethink borrowing strategies and rationalize public expenditures. This political agenda contrasts with that of the United States, where the Federal Reserve&s;s unconventional monetary measures may be set to absorb the increasing supply of US Treasuries.