that will take about €168bn out of the budget. The European Commission would like to add more debt, above what is already planned for a defence- loan programme and €90bn in help for Ukraine; it wants a debt-funded tool, worth over €300bn, to respond to unforeseen crises. Perhaps Mr Merz should consider the upside. A more debt-funded EU could help create a thriving market in European rather than national bonds. So far, EU debt is trading at a discount to equivalent German paper, the continental benchmark: yields are about 0.3 percentage points higher. This is largely because the EU has no tax-raising powers and in a crisis Germany would surely honour its own debts first. Nor is EU debt permanent; it is supposed to be repaid and not rolled over. That is one reason why it is omitted from sovereign-bond indices—which is unlikely to change, says an executive at an index provider. “You also need compensation for the lower liquidity,” adds Konstantin Veit of Pimco, a fixed-income asset manager. A liquid futures market for EU debt, say, would make hedging risk cheaper. Today’s derivatives market is too thin. Even new, debt-funded EU programmes are likely to be too small to make the market for EU debt sufficiently large and permanent. A potential solution is to convert existing national debt into European debt. Olivier Blanchard, a former chief economist of the IMF, and Ángel Ubide of
Citadel, a hedge fund, have argued that countries should issue debt worth 25% of GDP via the EU, as senior “blue” bonds. Spain has recently put a variant of that idea to the rest of the EU. Another idea is to issue all bills—short-term government bonds with a maturity of up to one year—jointly through the EU. Since bills are rarely included in debt restructurings, they are in effect senior debt. But the problem with both proposals is that they create some joint liabilities: who pays if things go wrong? “If you mutualise debt without a fiscal and political union, it is just a leap of faith,” says a senior commission official. Countries with low debts would have to trust those with lots. By international standards, the euro area’s combined debt-to-GDP ratio, of 90%, looks manageable. America’s exceeds 120%; China’s has risen fast to 100%. But some EU countries, such as France, Italy and Spain, have ratios above 100%. And Europe’s expected nominal growth rate of around 3.5%—at best 1.4% real, plus 2% inflation, says the IMF—is on par with its current long- term interest rate. That means debt-to-gdp ratios will not shrink without primary budget surpluses (ie, before interest payments). Morgan Stanley, a bank, reckons that interest costs, ageing and defence needs will add 3-5% of GDP to public spending by 2040. To put the debt ratio on a downward path by 2035 deficits must fall by 4-9% of GDP in the next decade, estimates the European Stability Mechanism, the euro zone’s main bail-out fund. Even Germany, normally a model of rectitude, is unsure how to fill budget gaps beyond 2028. That puts bold proposals for common EU debt out of reach for now. EU debt will remain limited and tied to common spending programmes such as that for Ukraine. Deeper financial-market integration, and raising the euro’s international standing, will have to happen without a shared European benchmark bond. And do not bank on German debt being the substitute for ever. “There is a plausible scenario”, says one investor, “in which Spain ends up being more solid than Germany a decade from now.” ■ This article was downloaded by zlibrary from https://www.economist.com/finance-and-economics/2026/07/30/a-common-european-safe- asset-is-still-unlikely
Finance & economics | Sanaenomics, not Abenomics Japan pursues an ill-timed fiscal stimulus Takaichi Sanae’s economic agenda bears little resemblance to her mentor’s Jul 30th 2026 Takaichi Sanae, Japan’s prime minister since October, positions herself as heir to the late Abe Shinzo, the country’s longest-serving leader. Many expected her to revive his “Abenomics” agenda, with its “three arrows” of loose money, expansionary fiscal policy and structural reform. Two plans published this month instead signal a departure. Whereas Abenomics sought to relegate Japan’s deflationary decades to history, Sanaenomics aims to steel Japan for geopolitical conflict. The honebuto, an annual economic blueprint, declares that Japan must keep pace with a global “Copernican revolution” in industrial policy. A new growth- strategy paper calls for ¥120trn ($733bn, or 18% of last year’s GDP) in new
public investment by 2040, to catalyse ¥250trn in private capital. Cash is to be spread across 17 sectors and 62 products, from ships to chips. For good measure Ms Takaichi wants a cut in sales tax on food, too. Of Abenomics’ three arrows, Sanaenomics keeps only one, fiscal stimulus. Though Ms Takaichi has pressed the Bank of Japan (BoJ) to keep interest rates low, it has raised them, from 0.5% when she took office to 1%. Political appetite for structural reform, such as boosting immigration and improving corporate governance, has waned. Yet it is an odd time for big- bang spending. Japan no longer faces a demand shortfall, as it did during the Abe years. Inflation has largely stayed above 2% since 2022, though it has dipped recently. The BoJ estimates that Japan has a positive “output gap” of 0.5%, implying that the economy is running slightly hot. Sanaenomics justifies stimulus another way. Ms Takaichi fears losing economic sovereignty, especially to a bullying China. She believes that Japan has suffered from chronic underinvestment and “excessive austerity”. Real public investment remains around 8% below 2019 levels, notes Stefan Angrick of Moodys Analytics, a consultancy. That, say Sanaenomics’ advocates, has perpetuated Japan’s deepest economic rot: cash hoarding by its firms. Much of that flows into investment abroad. To bring it back home,
Japan should use public investment to heat up its economy, argues Aida Takuji, a prominent Sanaeconomist. He advocates an output gap of 2%. According to Ms Takaichi’s growth strategy, public investment will not only beget private investment but also raise employment, consumer confidence and profits, starting a “virtuous cycle” of growth; taxes will rise without a rise in tax rates. This focus on growth, in turn, underpins an ambivalence towards Japan’s fiscal limits. In the honebuto, the old budget target of achieving a primary surplus (excluding interest) has been replaced by one emphasising a falling debt-to-GDP ratio, from which new “bridging bonds” will be exempted. New multi-year budgeting will fund favoured projects while sidelining the cautious finance ministry, notes Tobias Harris of Japan Foresight, a consultancy. Watering down the fiscal target could unshackle spending. Thanks to inflation, the net debt-to-GDP ratio, of around 130%, has been falling since the pandemic. That will continue for years so long as the nominal growth rate, now above 3%, exceeds the effective interest rate on Japan’s liabilities, which because of locked-in low rates is below 1%, estimates Goldman Sachs, a bank. The temptation is clear. As Mr Aida puts it: “The only fiscal burden is the interest cost. Strategic investments whose future benefits exceed their interest costs should therefore be financed through government bond issuance without hesitation.” In practice, Sanaenomics will face tighter constraints than its architects imagine. One is the bond market. Ten-year yields have risen sharply this year, to 2.8% from 2% in January. A further sell-off would gradually raise financing costs. If the budget deficit swelled to around 2% of GDP but ten- year yields stayed near current levels, the debt ratio would fall for the next decade, estimates Goldman. Yet were yields to rise to 3.5%, it would stop falling after five. This creates a timing problem. Any growth from Ms Takaichi’s investments could take decades to materialise, but the borrowing to finance them will hit markets right away. And the bond market is more sensitive that it used to be, as once-reliable domestic investors have been replaced by pickier foreigners. A second constraint is the BoJ, which looks likely to keep tightening. Every percentage point on interest rates costs the government an additional ¥5trn
(0.7% of GDP) in interest, reckons Deutsche Bank. Ms Takaichi, who before taking office called rate hikes “stupid”, may be tempted to bring the central bank to heel, as Abe did. But bond markets may rebel if she does. Gruff language about the BoJ in a preliminary release of the honebuto last month coincided with a three-decade high in ten-year yields (the final version nodded to its independence). Then there is inflation, where Ms Takaichi faces a dual bind. A spending- driven price surge would inflict pain on households, to which the cut in the sales tax on food is a response. But too little inflation, by dragging down nominal growth, could damage the fiscal outlook. The growth strategy simply envisions Japan threading the needle: 1% real growth with 2% inflation. But even 1% real growth requires a permanent boost to productivity. In an ageing, sluggish economy, that would be tricky even for an ambitious structural reformer, which Ms Takaichi is not. In effect, Sanaenomics is a bet that Japan’s capable bureaucrats can pick winners in 17 sectors so wisely that little else matters. Even for them, that is a tall order. ■ This article was downloaded by zlibrary from https://www.economist.com/finance-and-economics/2026/07/30/japan-pursues-an-ill- timed-fiscal-stimulus
Finance & economics | Buttonwood Retail investors should beware perpetual futures These peculiar products, popular in the crypto world, are hitting the mainstream Jul 30th 2026 Anyone who says they have reinvented an old idea is inviting suspicion. But if the idea concerns money, it is wiser to skip the suspicion and back away immediately. This is because “I have reinvented an old financial idea” means “I am about to take your money if you give me half a chance.” Perpetual futures were first traded in 2016 by Arthur Hayes, who co-founded the BitMEX exchange for cryptocurrency derivatives. Derivatives are financial contracts. Some have finer points that make even most traders’ eyes glaze over; traditional futures, though, are pretty simple and have been around for centuries. A future is an agreement to buy or sell something for an agreed price, on a set expiry date in the future. At the Dojima Exchange,