BRUSSELS, Feb 21 (Reuters Breakingviews) - The Covid-19 crisis prompted the European Union to turn to an instrument it had rarely used jointly: other people’s money. By promising nearly a trillion euros in new public borrowing, the 27-member bloc has become a big player in international capital markets.
Political divisions, however, risk making this a time-limited event. That would be a mistake. A rolling programme of debt sales could help the EU fund much-needed infrastructure, build buffers for future crises and support the euro. A permanent safe asset would also serve as an anchor for Europe’s still-immature capital markets.
In 2010, EU members balked at issuing common debt to dig Greece out of its giant fiscal hole. That refusal undermined market sentiment towards the monetary union, exacerbating a sovereign debt crisis that soon spread throughout the bloc.
A decade later, Germany’s decision to turn from austerity champion to big spender set the EU onto a different path. To fight Covid’s social and economic shocks, European capitals banded together to approve some 800 billion euros in new joint borrowing. Combined with a 100 billion euro programme to reduce unemployment and a handful of smaller pre-existing initiatives, that burst of debt issuance propelled the EU into the top tier of government bond players.
European countries are well established in global debt markets. The EU has a number of supranational issuers, but the bloc has never had the kind of joint borrowing clout enjoyed by the United States, and its collective efforts have historically been small.
From 2009 to 2019, the EU sold just 78 billion euros’ worth of debt into global capital markets. As of January 2023, outstanding issuance stood at 344 billion euros, including more than 275 billion euros sold since 2020. That’s still a fraction of the amounts sold each year by the United States and Japan, but it’s substantial enough to support a liquid secondary market.
The EU common debt has a strong foundation. The bloc now sells debt of differing maturities – from short-term bills to 30-year bonds – underpinning a benchmark set of interest rates that serves as a reference point for other euro-denominated securities. Brussels also created a large network of primary dealer banks to ensure smooth operations for sales and follow-on trading. Investors have cheered the programme, lapping up the debt without asking for exorbitant returns. In general, EU debt has tended to trade roughly on a par with France’s, although in its first sales of short-term bills in September 2021 yields fell to levels enjoyed by Germany, Europe’s most solid issuer.
EU debt is in the hands of more than 1,000 investors from more than 70 different countries, according to the bloc’s investor relations team. Over a third of them are fund managers, 26% bank treasuries, 21% central banks and 14% pension funds, with the rest held by insurance companies, banks and hedge funds.
All this liquidity prompted the European Central Bank to promote the EU to its highest tier of eligible collateral, meaning it can be used on the same terms as the debt of a single member state in monetary policy operations.
The danger, though, is that much of this progress could disappear after 2026 when the pandemic aid programme expires, and EU borrowing will be scaled back. Many European countries including Germany, the Netherlands and Finland are still stuck on the idea that debt invokes a moral question. They argue that borrowing more cash than you raise is fraught with dangers, even though many countries, including the United States, run ongoing large budget deficits.
Since investors fear new debt will dry up in a few years and liquidity may suffer, they are skittish. In January, EU borrowing costs were higher than that of French and German equivalents. EU-issued 10-year bond yields were at 3.02% as of Monday, compared to 2.43% for Germany and 2.90% for France .
The EU could allay investor fears, and reduce its borrowing costs, by setting up a permanent, large-scale programme of debt sales, as well as refinancing outstanding obligations. Contrary to what proponents of Teutonic austerity claim, more EU debt would be safer EU debt.
To win political backing for a permanent borrowing programme, though, the EU will need to overcome its members’ historic reluctance to borrow together and convince national capitals that new money will not translate into pure transfers from richer countries to the rest of the bloc.
The way forward is to separate decisions about borrowing capacity from debates over what the money will be spent on. Pandemic recovery was an indisputably needed joint project. Leftover funds from that effort now are being channelled into the green energy transition, but with the same set of expiration dates.
In the future the EU needs to incorporate a consistent level of joint borrowing into its plans. Member states could choose whether to make this money available for normal EU budget needs, save it in a rainy-day fund or assign it to a dedicated purpose like funding cross-border renewable energy or public transportation. They could put limits on whether and how to spend it – the important thing would be to maintain the market-access framework they built, so it’s available as needed in all economic conditions.
Some member states will say that such a project is not possible without changing the EU’s founding treaties. However, they said that in 2010 when they rejected the exact same structure of borrowing that they put in place now and turned instead to a rickety euro zone-only backstop that didn’t stand the test of time. If the political will is there, a technical solution can be found.
By selling bonds, the EU has created an impressive piece of financial infrastructure that can help its economy just as much as a cross-border train network or a power grid. Financial markets around the world are clamouring for a new anchor investment. If other people want to lend the EU money, its governments and institutions should put it to use for the common good.
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CONTEXT NEWS
The European Commission is empowered by the EU Treaties to borrow on international capital markets on behalf of the European Union, for designated uses agreed by the member states.
During the pandemic, the EU created two new borrowing programmes on a much larger scale than ever before: NextGenerationEU (NGEU), up to about 800 billion euros for pandemic recovery and the green transition; and Support to mitigate Unemployment Risks in an Emergency (SURE), up to 100 billion euros to prop up the job market. EU debt is rated AAA by Moody’s, Fitch, Scope and DBRS. It is rated AA-plus by Standard & Poor’s. It trades as a supranational institution, not as a full sovereign issuer. Member states including the Netherlands and Germany oppose permanent high levels of joint EU borrowing.
