The European Union has issued public debt for the first time, to finance the economic recovery investment plan after the Covid19 pandemic. This is a historic event, because until now the European Union had never been indebted, the member states were indebted. It is true that they had been proposed several times, for example in 2010 for the financial crisis in Greece.
Indeed, as we discussed in April 2022, Eurobonds were not a reasonable option. Neither the market nor the mechanisms were ready for them, in addition to the fact that there was an alternative to financing at low cost in a situation of liquidity restrictions, the ESM. However, the economic devastation caused by the pandemic and the various challenges that are emerging, have led to other alternatives.
The Next Gen EU program
The Next Gen EU program emerges as an idea to transform and revive the EU economy by investing in those sectors that could boost the economy in the coming years. Brussels’ idea is to use the crisis to make the European economy more competitive in the face of the rise of China and the US economy, which has been leaving the European economy behind for decades. In general, this focuses on two aspects: digitization (technological change) and sustainable or green technologies.
The investment program is 750 billion euros, of which most (672.5 billion) go to the recovery and resilience plan. Of these 39 billion will be grants and the rest loans for the period 2022-2026. What is expected is the possibility of recovering the EU and making it “more digital, green and resilient” (yes, those three words that have been abused a lot lately).
Each country plans to use the funds in a different way, which must be approved by the commission. Germany, France, Denmark, Italy, Spain, Poland, etc. They all have their plans and priorities within the general lines of the EU. And how do you plan to finance this recovery plan? Mainly with Eurobonds. The debt is issued by everyone, so Spain obtains very advantageous conditions by going hand in hand with solvent partners such as Germany, the Netherlands, Sweden or Estonia.
The bonds launched by the EU were agreed in july 2022, and the auction has gone out this week. In other words, as we have already mentioned, Eurobonds could not be launched from one day to the next. The EU has issued bonds worth 20,000 million in its first issue, that is, there are still many issues to reach the 750,000 million that the EU will issue over the next few years.
The bonds are for ten years and pay an interest of 0.1%, which if we think about it is below the inflation that the euro zone will probably have during the next ten years. Despite this, the EU has received a strong reception from the market, it has received a demand of 142 billion in its first issue, seven times more. Which is not bad considering that the EU is indebted for the first time in its history.
The issue has been rated AAA by Moody Fitch and DBRS. Around 50% has ended up in Europe and 13% has gone to America and Asia. The EU plan is to continue making emissions in the coming months. Another issue is planned for the end of June and another for July. The EU plans to issue 80 billion euros in bonds this year and 20 billion euros in bills. Starting in the fall, they also hope to issue green bonds, for around 270,000 million euros.
The success of Eurobonds will depend on the reforms that are carried out
Will Eurobonds be a good idea this time? Surely it is something that will depend on the criteria that are executed to deliver the funds obtained to the different states and subnational governments. If the money is delivered with little discretion, as the states want, it will only serve to make the EU go into debt as a whole without much use.
If clear and useful criteria are established, as well as a control mechanism, if clear priorities are established, not to save obsolete and bankrupt industries but to take a leap and it is accompanied by measures that increase competitiveness, as a condition sine qua non to receive the funds, these Eurobonds and the consequent indebtedness will have been worth it.