The Ukraine rescue package amounting to 90 billion euros, agreed last week by the European Union, deepens the path toward the creation of eurobonds, a European asset destined to rival the U.S. Treasury bonds, just as the euro did with the dollar. A quarter of a century after the birth of the single currency, Europe still lacks sovereign debt issuances equivalent to the national ones, a shortcoming that prevents fully exploiting the potential of the monetary union. Yet the immense needs for common funding confronting the EU are pushing toward the emergence of genuine eurobonds, designed to become a safe asset that, as Mario Draghi outlined in his renowned report last year, “allows financing of joint investment projects among the Member States and helps integrate European capital markets.”
EU partners such as Germany, the Netherlands, or Austria resist that colossal leap in integration, comparable to the birth of the single currency. They fear being forced to assume the red numbers of other EU countries, a threat that was also invoked for years to prevent the euro’s introduction.
“The volume of debt placed on the market by Brussels under the EU budget grows so exponentially that eurobonds begin to appear as debt that is unsustainable”
However, the volume of debt issued by Brussels on the EU budget scales so exponentially that eurobonds are already seen as the inevitable outcome of a debt that will hardly be sustainable if it does not have the indissoluble and unlimited backing of all the Union’s partners.
According to specialists, with a federal eurobond rather than the current joint debt, the EU could finance itself more stably and cheaply, and the euro would gain weight in international markets.
For forty years, the European Commission has financed extraordinary needs with debt issuances such as the one agreed at the European summit last Thursday for Ukraine. Those bond placements in the market had remained for decades at such negligible levels that they went almost unnoticed.
Everything changed with COVID-19, which triggered the rise of shared financing needs. Since then, the EU’s red numbers have surged. In the decade before the pandemic (2009-2019), the European Commission issued debt onto the market worth €79 billion. In the following five years, issuances have multiplied by almost ten and surpassed €600 billion, largely due to the Recovery Fund (NextGenerationEU) and the allocation to partly cover the ERTEs caused by the pandemic.
And the upward trend in issuances continues because the EU has launched a joint military rearmament program (SAFE) with debt of up to €150 billion. The Ukraine aid package will add another €90 billion, which appears to be only a first tranche for the enormous reconstruction bill for the damage caused by Russia’s attacks.
“The stock of EU debt in the market now reaches €700 billion and is expected to soon surpass the trillion-euro milestone”
The stock of EU debt on the market already stands at €700 billion, and it is expected to surpass the one-trillion-euro mark in the near future. “It is evident that the future lies in that joint financing of Europe’s priorities,” stated this Sunday the president of the European Investment Bank, Nadia Calviño, in an interview with Agenda Pública, detailing how either Ukraine support, security and defense policy, or the large-scale infrastructure investments that are necessary will be financed through the EU financial institution she leads.
But the seams of the European budget backing these issuances are beginning to creak. Investors increasingly accept the Commission bonds with growing reluctance, and the risk premium relative to the German bund has not stopped widening since the pandemic. The deterioration in the market’s perception of Commission bonds is such that countries like Spain have forgone most NextGeneration loans because they would be more expensive than borrowing with national bonds, even though the EU’s credit rating is higher than Spain’s.
The Commission itself acknowledges that the placement of these pseudo-eurobonds is beginning to face difficulties. It fears that the Ukraine emission could worsen the situation and hamper its ability to finance other EU programs. The Commission’s president, Ursula von der Leyen, warned in a letter to the heads of government dated November 17 that if support for Ukraine is financed with debt, as has been agreed, these issuances “will need to be managed carefully to limit any impact on the interest rates the Union will pay on its overall borrowing, including debt allocated to other programs financed with debt (NextGenerationEU, SAFE, etc.).”
Never before has the EU carried so much outstanding debt and, above all, so much to come. As Draghi noted, financing pan-European interest and goods requires the creation of a common safe asset—the Eurobonds, with capital letters—backed unconditionally by the Union’s partners. The reconstruction bill for Ukraine, which the World Bank estimated at €506 billion by the end of 2024, could be the drop that fills the cup of Europe’s precarious debt. And it may force a step toward European securities capable of competing with U.S. Treasuries or with the German bund. If the euro was born from the end of the Cold War, the end of Russia’s war against Ukraine could accelerate the path toward real eurobonds.
