Economies

The EU’s six largest economies are urging Brussels to accelerate the long-awaited integration of capital markets to “strengthen Europe’s growth potential”, according to a letter sent on Tuesday to the Eurogroup boss and several EU commissioners.

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The finance ministers of France, Germany, Italy, the Netherlands, Poland and Spain say that making tangible progress on the rebranded “Savings and Investment Union” has become an “urgent necessity,” pledging to push “this important project forward”, in a letter addressed to EU economy chief Valdis Dombrovskis and Eurogroup President.

“Deeper and more integrated capital markets would strengthen Europe’s growth potential, enhance its economic sovereignty and provide a stronger foundation for financing common priorities,” the letter said.

In particular, the ministers call on EU institutions to reach an agreement among member states by summer on one of the key elements of the capital markets integration agenda: the Market Integration and Supervision Package (MISP).

The MISP is a set of legislative proposals by the European Commission aimed at strengthening the supervision of financial market infrastructures across the bloc and improving how they operate.

“A central purpose of the package is to remove national barriers and to improve cross border distribution of investment funds, so investors have better access to the EU capital markets and companies benefit from deeper pools of capital”, the letter says.

The six countries also ask the EU to advance its digital payments agenda, specifically by promoting private pan-European payment networks that can compete with US-based Visa and Mastercard, and by accelerating the adoption of the digital euro.

Agreement by the summer

Capital markets allow companies and governments to raise funds by selling assets such as shares or bonds to investors.

To strengthen and integrate these markets across the EU, the European Commission has proposed a series of legislative measures under the Savings and Investment Union package.

In recent months, EU countries and institutions have signalled a more ambitious goal, aiming for an agreement among co-legislators on most of the SIU legislation by June.

However, EU countries are not fully aligned on the technical aspects of capital markets integration, causing delays to the broader strategic agenda.

Another key legislative proposal is the revisions of the securitisation framework, which are EU rules introduced in 2019 with the objective of ensuring safer market practices, to avoid other financial crisis such as the 2008 global shock.

The revision, which aims to simplify certain requirements and reduce high operational costs, is to be approved by autumn 2026, according to signatories.

Digital payments

The six EU countries also support the development of additional pan-European private digital payment solutions, viewed as a key pillar of the EU’s strategic autonomy, since most digital payments are currently processed through US-based infrastructures.

According to 2025 European Central Bank data, Mastercard and Visa account for 61% of card payments and nearly 100% of cross-border ones.

In this context, the six countries are also calling for an accelerated rollout of a public digital payment solution: the digital euro. Currently under negotiation, it would be an electronic form of cash issued by the European Central Bank, serving as an additional payment option alongside cash and bank-issued cards.

The project is facing significant delays in the European Parliament. In particular, the leading rapporteur on the file, the Spanish centre-right MEP Fernando Navarrete, is pushing to reduce the scope of the digital euro to offline payments only, in order to avoid competing with other private infrastructure, such as Visa and Mastercard.

“We push for swift conclusions of the legislative process of the digital euro and we invite the European Parliament to follow the Council’s approach to establish the digital euro (in both its online and offline modalities) as a comprehensive, interoperable and sovereign European payment solution for European citizens”, the six countries wrote in the letter.

The co-legislators initially aimed for full adoption of the digital euro by the end of 2026. However, due to delays in the parliament, the six countries have not set a specific adoption deadline.

Artificial intelligence could deliver the productivity surge policymakers have been hoping for since the global financial crisis. But even if it does, economists caution that faster growth will not be enough to solve the mounting debt burdens weighing on advanced economies.

Public debt already exceeds 100% of GDP across most rich nations and is projected to rise further as ageing populations strain pension and healthcare systems, interest bills climb and governments ramp up defence and climate spending. Against that backdrop, AI is increasingly being framed as a potential fiscal lifeline.

The reality is more complicated.

Productivity: The “Magic” Ingredient-With Limits

Economists broadly agree that sustained productivity growth can dramatically improve fiscal dynamics. Higher output boosts tax revenues without raising tax rates, makes existing debt easier to service and reassures bond investors worried about long-term solvency.

At the Organisation for Economic Co-operation and Development (OECD), modelling suggests that if AI meaningfully raises labour productivity and if employment also expands public debt across member countries could be about 10 percentage points lower by the mid-2030s than otherwise projected. Even then, debt would still climb to roughly 150% of GDP on current trajectories, up from around 110% today.

In the United States, best-case projections from several economists suggest debt could rise more gradually, to roughly 120% of GDP over the next decade rather than accelerating more sharply. But that still represents historically elevated levels.

As one economist put it, productivity is “like magic” for fiscal sustainability yet today’s debt challenges are too large for productivity gains alone to offset.

Demographics: The Structural Headwind

The fundamental constraint is demographic.

Ageing populations mean fewer workers supporting more retirees, pushing up pension and healthcare costs. In the United States, Social Security alone accounts for roughly one-fifth of federal spending, and benefits are indexed to wages. If AI lifts wages, it may simultaneously increase future benefit obligations.

Slowing immigration in some countries, particularly the U.S., compounds the issue by limiting labour force growth. If AI boosts output per worker but the total number of workers stagnates or declines, overall fiscal relief may be limited.

In short, AI may buy time but it does not reverse the demographic arithmetic driving long-term deficits.

Growth vs. Interest Rates: A Delicate Balance

For debt sustainability, what matters is not just growth, but the relationship between growth and borrowing costs.

If AI-driven productivity pushes economic growth above interest rates for a sustained period, governments can stabilise or even reduce debt ratios more easily. But if faster growth also lifts real interest rates for example, because higher productivity raises returns on capital then debt servicing costs could rise in parallel.

This debate is already unfolding among policymakers at the Federal Reserve, where officials are assessing whether AI could permanently raise the economy’s potential growth rate.

Bond markets will be decisive. Since the pandemic, investors have shown a willingness to punish governments perceived as fiscally profligate. Higher yields can quickly offset any growth dividend from technological gains.

Employment and Wages: The Distribution Question

Much depends on how AI reshapes labour markets.

If AI complements workers and creates new categories of employment, tax revenues may rise meaningfully. But if automation displaces workers faster than new jobs are created, or if profits accrue disproportionately to capital rather than labour, fiscal gains could disappoint.

Capital income is often taxed more lightly than wages. A productivity boom concentrated in corporate profits rather than payrolls may widen inequality without generating proportionate public revenue.

On the spending side, governments might benefit from efficiency gains in public administration. Yet history suggests higher growth can also lead to higher spending demands from infrastructure upgrades to social transfers.

No Substitute for Fiscal Reform

Even in optimistic scenarios where AI lifts U.S. growth closer to 3% annually for an extended period, debt ratios are projected to stabilise at elevated levels rather than return to pre-crisis norms.

In pessimistic scenarios where AI disappoints or a recession strikes before productivity gains materialise debt trajectories could worsen significantly, potentially reaching levels that trigger market instability.

The consensus among economists is clear: AI can ease fiscal pressure, but it cannot substitute for structural reforms. Addressing entitlement sustainability, improving tax efficiency and managing spending priorities remain central.

A Race Against Time

There is also a sequencing risk. If financial markets grow nervous about fiscal trajectories before AI-driven gains are realised, borrowing costs could spike. In that case, the productivity dividend may arrive too late to calm bond investors.

Technological revolutions historically take time to diffuse across economies. Infrastructure, regulation, workforce training and corporate adoption all shape how quickly productivity benefits materialise.

For debt-laden economies, the gamble is that AI’s boost will be large, broad-based and timely. That is possible but far from guaranteed.

AI may help governments breathe easier. It will not absolve them of the harder political choices required to put public finances on a sustainable path.

With information from Reuters.