WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

By Philipp Heimberger

In the last months of 2020, the EU issued its first COVID-related bonds. The money raised by the EU Commission on the financial markets will be used to finance the so-called SURE program, which was adopted in April 2020 as part of a European package of measures in response to the COVID-19 crisis.

The funds raised by issuing EU bonds are passed on to the member states; they will help governments keep workers in their jobs during the pandemic. The EU's support for short-time work programs in the face of huge labour market problems is an important contribution to tackling the crisis.

When the first SURE bonds were issued in October 2020, the EU Commission raised €17 billion at an interest rate of -0.26%. Investors are thus paying the EU money to buy the bonds. Demand for the EU bonds exceeded supply by more than 13 times.

This was just the beginning: The EU recovery fund (“Next Generation EU") will be used over the next years to finance investment and reform projects in individual EU member countries. This will make a significant contribution in ensuring that the EU member states do not drift further apart economically after Corona.

To finance the EU recovery fund, the European Commission will borrow up to €750 billion on the financial markets on behalf of the EU. This will make the EU one of the most important players in Europe's bond markets.

It is a major political development that "Next Generation EU" will provide €390 billion to member states through grants that do not have to be repaid and €360 billion through repayable loans. For the first time, the EU is tapping funds from financial investors in such a large volume.

The massive demand for the first COVID-related EU bonds shows that investors are looking for "safe havens". With the EU as a debtor, they are willing to accept negative interest rates.

This demonstrates the immense potential of EU bonds backed by all member states. This should also be used for future EU investment programs to address important challenges such as climate change and digitalisation.

How much money the EU will borrow exactly for the EU recovery fund on financial markets remains uncertain. The funds from the EU recovery fund are linked to investment and reform projects. If the member states do not come up with plans that fit with the bloc’s conditionality, they will not be able to tap all of the funds.

Furthermore, while all governments want to make full use of their share of the grants in “Next Generation EU” (which they will not have to repay), it is not clear whether all want to take full advantage of the available "Next Generation EU" loans, which they would need to repay (although under very favourable conditions). Governments like those in Madrid and Rome would like to avoid the conditions attached to the use of these “Next Generation EU” loans. This is mainly due to the Southern Europeans’ negative experience with the Troika's fiscal austerity conditions from the times of the Euro crisis.

At the end of last year, there were discussions within the ECB about whether the central bank's pandemic bond purchases should be reduced for those countries that do not make full use of the available EU loans from the EU recovery fund. However, this would be a dangerous gamble that the ECB should refrain from: it could lead to speculation and turbulence in financial markets, which Europe does not need at all at this juncture.

Note: Translated and adapted from a comment that first appeared in “Handelsblatt”. The original article is here (in German).