Debt issuance by the European Commission on behalf of the European Union has increased massively. Of the approximately €400 billion in outstanding EU debt as of May 2023, 85 percent has arisen from borrowing since 2020. Large-scale borrowing is expected to continue until 2026 to fund the remainder of NextGenerationEU, and concessional loans to support Ukraine.
When these programmes were launched, interest rates were at historic lows – even negative for maturities below 10 years. However, interest rates rose sharply in 2022. Beyond the widespread rise in euro-denominated interest rates due to monetary tightening by the European Central Bank in response to the inflation surge, the EU has also faced a widening of the spread between its yields and those of major European issuers, including France and Germany. This widening is driven by a combination of market features, circumstantial factors and institutional features.
The EU cannot affect the overall cyclical movement of interest rates and will have to learn to live with it, like sovereigns do. However, the European Commission should continue to try to narrow the spread with major European sovereigns by further developing the relevant market infrastructure and improving its issuance strategy. The Commission will not be able to do this alone. Institutional developments, including progress on the development of new own resources and a long-term substantial presence in the bond market, will be necessary to fully reap the benefits of EU borrowing.
A large share of EU borrowing (around €421 billion in total by the end of 2026, in current prices) is intended to finance unprecedented non-repayable support: Recovery and Resilience Fund grants and additional funding for existing EU programmes under the EU budget. The interest costs associated with this part of the debt lie with the EU budget. Our estimates suggest that, because of the high current and expected levels of interest rates, this cost could be twice as high as what was initially estimated at the start of the EU’s 2021-27 budget cycle.
As a result, because interest costs for the borrowing of the non-repayable support are accounted for under the EU budget’s ‘expenditure ceiling’, this will exert further pressure on the funding of important EU programmes, which are already affected by inflation. The EU should thus quickly review how interest costs are accounted for in its budget and financial framework.
The European Commission has long issued debt on behalf of the European Union, but the scale and nature of this borrowing has changed drastically since the COVID-19 crisis. Previously, the Commission mainly issued debt to finance three lending programmes to support countries experiencing financial difficulties: the European Financial Stability Mechanism (EFSM) for euro-area countries, Balance of Payment (BoP) assistance for non-euro-area EU countries, and Macro-Financial Assistance (MFA) for non-EU countries.
While these programmes are backed by different forms of guarantee, these loans are all distributed on a ‘back-to-back’ basis, meaning that, while the recipient countries benefit from the more favourable borrowing conditions generally available to the EU, they are responsible directly for repaying the debt and interest costs incurred 1. Consequently, until the COVID-19 crisis, EU borrowing was relatively small in scale and dependent on the timing of recipients’ needs, making the Commission an infrequent player on financial markets.
This changed in 2020. The EU increased its borrowing massively to create two new instruments in response to the COVID-19 crisis: Support to mitigate Unemployment Risks in an Emergency (SURE) and NextGenerationEU (NGEU). SURE was designed to reduce the financing cost of national short-term work schemes, which were a crucial tool to avoid an increase in unemployment during COVID-19 lockdowns, and consisted of €98.4 billion in back-to-back loans distributed to 19 countries between 2020 and 2022. SURE debt was issued in the form of social bonds 2 . The ongoing NGEU programme meanwhile provides loans 3 (up to €385.8 billion in current prices) and grants (€338 billion) to EU countries through the Recovery and Resilience Facility (RRF), and provides additional support (€83.1 billion) to six EU programmes under the Multiannual Financial Framework (MFF) 4 .
The introduction of these two instruments changed the nature of the EU as a borrower and entailed a very significant increase in EU debt issuance. Over 93 percent of the bonds issued by the Commission between October 2020 and December 2022 went towards financing these two instruments. Of the approximately €398 billion in outstanding EU debt as of 30 April 2023, over €350 billion comes from borrowing since October 2020 – ie when SURE borrowing started 5 . As a result, EU total outstanding debt (Figure 1) is already larger than the debt of EU countries including Austria and Greece, and should exceed the nominal level of debt of the Netherlands in 2024. Moreover, to issue such a large amount of EU debt efficiently, the European Commission quickly built a comprehensive borrowing strategy, based on the best practices of major EU issuers, using a mixture of syndicated transactions and auctions, and relying on a large primary dealer network 6 (details on the number, the average size of issuances and the coverage ratio of each type of operation can be found in Table A1 in the annex).
About the Authors
Grégory Claeys is a Senior fellow at Bruegel.
Conor McCaffrey is Research assistant at Bruegel.
Lennard Welslau is a Research Assistant at Bruegel.