When an EU member state wants to borrow money, it usually does so itself, through government bonds. Strong economy? Low interest rates. Weak economy? High interest rates. With Eurobonds, the EU does this collectively: one loan, for which all member states jointly guarantee. This makes borrowing cheaper for countries with high public debt, but the risks are shared.
Since the coronavirus crisis, it is no longer just a theory: in 2020, the coronavirus recovery fund was set up, worth around €750 billion. Since then, Eurobonds are no longer an abstract idea, but more real than ever. Recently, the European Commission raised another €5 billion through a bond auction, with maturities until 2042. This auction is part of the broader financing program that has been set in motion since the coronavirus recovery fund. That tension is once again topical, now that EU ministers approved the new €150 billion European defense fund at the end of May. Like the coronavirus recovery fund, this fund will be financed entirely through joint loans, or eurobonds.
But why is there so much debate? The Netherlands has traditionally been frugal. Not because it is unwilling to show European solidarity, but out of concern for financial discipline. As was also noted in Trouw, there is concern in the Netherlands that Eurobonds will encourage countries with high levels of debt to borrow even more, without any immediate consequences. The incentive of the capital market, higher interest rates for risky policies, could disappear if everyone acts as a joint guarantor.
So what are the advantages? For countries such as Italy and Greece, the coronavirus recovery fund meant direct access to cheap financing. The money could be used for digitization, sustainability, and recovery. According to the European Commission, this led to faster economic growth and reforms. Moreover, the EU positioned itself as a strong player on the world market, something that is being pursued again with Commission President Von der Leyen's new defense plan. The idea is that together we are stronger. It also makes economic sense, as joint loans yield lower interest rates. In view of geopolitical uncertainty, such as the changing role of the US as a partner of Europe, rapidly available capital is important for strategic autonomy, for example.
So what are the risks? This spring, the European Court of Auditors was particularly critical of the coronavirus recovery fund. In a damning report, it stated that there was little visibility on where the money went or what it achieved. Fraud investigations in Italy, shady iPad purchases for schoolchildren, and overcompensation for sustainability measures are not exceptions. The Netherlands, which was late in submitting its plans, is now also at risk of losing money due to lagging reforms.The coronavirus fund was also partly based on subsidies that will never be recouped. The current plan for defense works differently: member states borrow directly from Brussels and pay back the money. In theory, this is less risky, but if one country fails to repay its debt to Brussels, other countries, such as the Netherlands, will still have to foot the bill.
The Eurobond is therefore no longer a vision for the future, but a reality that we must deal with. Given international developments, this instrument will probably be used more often, whether you are for or against it. The real question is therefore not whether we use Eurobonds, but how. What we can learn from the coronavirus recovery fund is that you cannot build on shared debt without shared responsibility. Without transparency about spending, goals, and performance, and without clear accountability in the joint system, the system loses its legitimacy and, with it, its support.
In addition to simply allocating funds for defense spending, it is important to have a strong defense industry where the money can actually be spent. We will discuss this and other topics at the event that Castro is organizing on June 23 together with the American Chamber of Commerce in the Netherlands (AmCham) in the run-up to the NATO summit in The Hague. Among others, State Secretary for Defense Gijs Tuinman and former NATO Secretary General Anders Fogh Rasmussen will speak at this event.
Would you like to know more or discuss this further? Please contact Roel Yska (roel@castro.lu).