Brussels seeks to preserve Europe through the establishment of a debt alliance
During the EU special summit in Brussels in July 2020, Europe was grappling with the coronavirus pandemic. While efforts were focused on procuring masks, vaccines, and reducing infection rates, a significant shift occurred under the radar. For the first time ever, EU countries agreed to share debts for reconstruction and coronavirus crisis aftermath costs. The EU Commission was empowered to raise up to 750 billion euros for this purpose through so-called "NextGenerationEU (NGEU)" bonds.
These funds are intended to lay the groundwork for a permanent debt union in the EU. This could be a potential threat for the EU, given its escalating budget deficit. Repayment of interest and capital on the coronavirus reconstruction fund could potentially push the EU budget to breaking points in the upcoming years, with annual obligations of around 30 billion euros predicted.
Brussels now considers extending the bonds from the coronavirus period, according to the British "Financial Times". Former ECB chief Mario Draghi advised during the first week of the new week that EU members should consider increasing the EU Commission's resources by delaying repayment of NGEU bonds. Essentially, the proposed solution is to pay off the existing bonds by issuing new ones — a practice followed by all EU nations with their government bonds. This move could mark the beginning of a permanent sharing of debt in the European Union.
Euro-Bonds to counteract Europe's decline
Officially, the EU has thus far incurred around 96 billion euros in joint debt through the 2020-agreed NGEU credit framework. However, 171 billion euros have already been earmarked for the coronavirus reconstruction fund, which could potential rise to 358 billion euros. The EU intended to finance the repayment of these joint debts through its own resources, planning to introduce new mechanisms such as a digital tax, plastic tax, and CO2 trading revenues.
However, these initiatives have not been implemented yet. The repayments are set to start in 2028, and all joint debts should be cleared by 2058. Further crises, such as Russia's attack on Ukraine and escalating energy costs, have weakened the EU's competitiveness since the summer of 2020.
Either EU members will need to contribute more funds to the EU budget to bear the increasing financial burdens or the multi-year EU financial framework will have to be reduced. "If nothing happens, there will be a shock in the contributions of the member states, or the existing budget will have to be reduced," an EU official told the "FT". Overcoming the debt would therefore make "absolute sense," said another official in Brussels.
Lindner is not in favor of the idea
In his report, former ECB President Mario Draghi suggested that Europe requires at least €750 to €800 billion annually for new investments in the energy transition, digitalization, and defense to keep pace with the US and China and be prepared to counteract Russia. This amounts to close to 5% of Europe's annual economic output, a significant increase considering that the EU currently spends only around 1% of its GDP.
Moreover, the EU financial markets and spending are currently fragmented. Issuing joint bonds could aggregate their spending power. These securities would absorb the market as a standard, stable bond, enabling banks to secure their refinancing activities, attract more global capital to Europe, and potentially become a gold standard in the financial market, serving as a reserve for foreign central banks.
The plan is not to expand EU joint debt-making but to maintain it at the level agreed upon in the summer of 2020. However, convincing all EU states to support the idea is challenging, with Germany playing a pivotal role. The German Constitutional Court approved the Corona Recovery Fund only on the condition that it remains a one-time, limited measure. Furthermore, Finance Minister Christian Lindner sees Draghi's plans as impractical; they indicate Germany backing other nations' public finances, which he considers non-negotiable.
In the past, when the Corona Recovery Fund and EU's first joint debts were agreed upon, Germany was under Angela Merkel's leadership, and her Finance Minister Olaf Scholz regarded the Corona bonds as "a historic opportunity" to shape Europe's future. As he now holds the Chancellor position, he might soon need to demonstrate his commitment to his past statements.
The agreement to share debts among EU countries for reconstruction and crisis aftermath costs has increased the EU's government debt significantly. Repayment of interest and capital on the coronavirus reconstruction fund could push the EU budget to breaking points in the upcoming years, potentially causing a shock in the contributions of EU member states or requiring a reduction in the multi-year EU financial framework.
