The decision on how much of their hard-earned income citizens are willing to hand over to the state is a matter of trust. If parliament and the government use tax revenues sensibly—for example, for investments in highways and railways—trust in the state's authority to tax grows. If voters get the impression that politicians and bureaucracy are wasting tax money, tax resistance grows. Therefore, what the money is used for is crucial for trust. This applies all the more when the state takes on debt.
In the simmering discussion about the international role of the euro, this simple economic principle is turned on its head. Then comes the call for safe euro-denominated assets, for securities in which international investors can invest without serious default risk. What is usually meant are Eurobonds, which, in whatever concrete form, socialize the default risk of state borrowing in the euro area and distribute it among all national taxpayers of the euro states. Such Eurobonds are said to be necessary in large quantities to provide investors with a large volume of safe assets.
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Brussels will always find a "need" for new debt
The question is then not asked—or asked only secondarily—what the debt is supposed to be used for. The alleged need arises solely from the fact that a large amount of government debt is required to stand up to the dominance of the dollar. It is easy to imagine how quickly parliamentarians in distant Brussels will invent ostensibly sensible projects to cover this alleged "need" for government debt. Voters' trust in further European integration is difficult to gain this way.
At the latest since last year, when European Central Bank (ECB) President Christine Lagarde proclaimed the "global euro moment" in light of the uncertainties surrounding the United States under Donald Trump, calls for Eurobonds have been making the rounds again. This corresponds to French thinking, which has always viewed the euro as a project of European greatness more than the Germans, rather than purely economically. Just recently, the employer-leaning German Economic Institute (IW) also adopted the argument for Eurobonds. They claimed that these are necessary in the medium term so that the euro can fulfill a role as an international anchor currency.
The pros and cons of an anchor currency
From an economic perspective, the advantages and disadvantages of an anchor currency must be weighed soberly. It is considered an advantage that an anchor currency like the dollar attracts capital and is used on a large scale by non-Americans for trade and as a store of value. This brings the United States the "exorbitant privilege" of being able to finance its debt more cheaply than other states. Anyone seeking a high degree of state influence on the economy may see an advantage in this. From the taxpayer's perspective, the interest privilege can turn into a disadvantage because it encourages higher government debt.
The biggest disadvantage of anchor currency status is considered to be that the attraction for foreign capital leads to an appreciation trend, which displeases exporters. The role of an anchor currency also requires the central bank to assume a certain responsibility for international financial markets, as demonstrated, for example, in the global financial crisis nearly 20 years ago. This flatters the ego of central bankers, but from the citizens' perspective, it becomes dangerous if it conflicts with the domestic stability goals of monetary policy.
Weighing these arguments, the ECB, at least in its early days, did not seek an international anchor currency role for the euro. That Lagarde sees it differently is also due to a growing geopolitical awareness that Europe should play a larger role between the US and China. One may argue about whether the euro as an anchor currency is indispensable for this.
Regardless, a European debt union would not strengthen the international role of the euro, but weaken it. In the euro area, the fact that governments compete with each other for capital still has a disciplining effect on them. Investors punish unsound financial conduct with higher interest rates. The more the disciplining market within the euro area is leveraged out by Eurobonds, the more the inclination toward debt increases. The more debt weighs on the shoulders of taxpayers. The more unattractive the euro becomes for international investors. This can be observed in the United States.
