BRUSSELS Joint debt is talked about in the EU every day now.
For example, growing the defense industry and equipping Ukraine with military equipment require so much money from the EU that the EU budget is not enough.
Eurobonds, i.e. joint debt, are offered as a solution. In this model, the EU Commission could take a loan from the money market.
For example, the Prime Minister of Estonia Kaja Kallas proposed Eurobonds for defense industry investments. President of France Emmanuel Macron repeats Eurobonds often. Joint debt was also discussed at the summit of EU leaders in March.
Germany, the Netherlands, Austria, Sweden and Finland oppose joint debt.
In Brussels, it has been interpreted as having softened Finland’s position on the joint debt in the event that the loan would be used for the benefit of Ukraine. Prime minister Petteri Orpon (collective), funding must first be sought from everywhere other than joint debt, but no option should be ruled out completely.
In the parliament’s EU debate last Wednesday, Orpo again clearly rejected the joint debt.
– Taking on a joint debt also raises its head. We don’t support that, and neither do member countries who think the same as us, Orpo said.
Nordea’s chief analyst Jan von Gerich thinks that joint debt will be taken. The model is the joint debt adopted for the corona crisis.
– Once such an instrument has been created, it will probably be used in the future.
Opponents don’t want more EU or other people’s messes
According to the opponents of joint debt, countries that have managed their finances well have to manage the messes of bad managers.
According to Jan von Gerich, opponents of joint debt are afraid of free riders.
– If it were thought that everyone would work according to common rules, then there would probably be more support for joint debt.
There is a lack of trust between the countries. Other member countries pursue a stricter fiscal policy, while others take on more debt. It is feared that an indebted country will also manage its collective debt worse, in which case it may fall to be paid by others.
When a country that pays high interest on its debt gets EU-guaranteed debt at a cheaper price, it can also be lazier to reform its economy.
Politicians oppose joint debt also because, along with the debt, decision-making power would shift to the EU Commission. It would be a step towards a federal state and would generally mean more EU.
Fear is also the endless list of needs. After Corona, joint debt has been proposed to finance green transition activities, manage the energy crisis, strengthen digitalization, support Ukraine, grow the defense industry and investments.
The corona crisis opened the way to joint debt
The corona raised the crisis mood so that even the big four who opposed joint debt – Holland, Austria, Sweden and Denmark – were brought to the same front. The package was emphasized to be unique.
The joint debt could also be set in motion by a crisis such as the decisive deterioration of the frontline situation in Ukraine.
– Joint debt had always been a no-go area. Then, in the conditions of the pandemic, joint debt was taken out in a few months, professor Maria Demertzis says.
He is a senior researcher at the Bruegel think tank in Brussels, specializing in economics.
According to him, the financing required by climate change is hindered by the fact that the effects will only be visible after some time. The pandemic, on the other hand, was dangerous at that moment.
– The discussion has not progressed much, even though the EU’s money needs are large and growing all the time. There is a gap of more than 400 billion euros in the green transition and digitalization. Defense and the reconstruction of Ukraine come to the fore.
For example, the budget of the EU for the seven-year period is 1074 billion euros.
At the same time, many countries are so indebted that it is difficult for them to increase their own debt load. Joint debt does not increase the country’s own level of indebtedness.
According to Demertzis, huge financial needs require all means, including joint debt.
According to him, EU projects also need private money. Attracting investors, however, requires the development of the EU’s capital market.
According to him, expanding the financing of the European Investment Bank is a good idea. Finland and 13 other member countries submitted an initiative to the EU summit to change the bank’s mission so that the bank could also finance the defense industry.
– The European Investment Bank could do more and take more risks.
Finland gets a loan cheaper than the EU
For example, Germany, the Netherlands and Finland also get loans from the market cheaper than the EU.
It means that the EU is not a safe harbor for financiers like big economies.
According to Demertzis, the reason for the higher interest rate paid by the EU is the smallness and temporary nature of the loan.
– Europe’s debt is not large. The number has to be bigger to be interesting. Moreover, the debt of the recovery package is temporary, it is not an ongoing project.
According to Jan von Gerich, the EU has not established its position on the loan market.
– Certainly investors have question marks about the future of this market, that if they tried to at least officially say that this is a one-off. After all, the investor does not see that such a market necessarily has a longer-term future.
According to von Gerich, the market also has a trust problem.
– We think that not all countries are fully committed to this project.
However, most EU countries pay more interest on their loans than the EU.
The EU agreed on a joint debt for the corona recovery package in 2020. The money was supposed to support the economies devastated by the corona shutdowns and get future-oriented investments in motion.
For the recovery package, the EU Commission took out a loan of around 807 billion euros at current prices. Of this, 390 billion euros were distributed as subsidies and the rest was to be distributed as loans to member countries.
Finland received 2.6 billion euros in grants.
In the end, taking out the loan was not very popular. A few countries got a loan cheaply themselves. Some were afraid of the weakness of the economy, which reflects the reliance on the EU loan.
The debt should start to be reduced in 2028. However, governments often replace old debt with new debt, i.e. roll the debt forward.
Do you see the good sides of joint debt?