Philipp Heimberger is an economist at the Vienna Institute for International Economic Studies and at the Institute for Overall Analysis of the Economy, Linz.
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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 is used to finance the Sure program, which was decided in April as part of a European package of measures.
The funds from the EU bonds are passed on to the Member States; they are there to assist governments in keeping workers in work during the pandemic. The fact that the EU is supporting short-time working programs in the face of enormous labor market problems is an important contribution to crisis management.
At the first issue in October, the EU Commission placed bonds with a volume of 17 billion euros at an interest rate of -0.26 percent. So investors pay the EU money to be able to give their credit. The demand for the EU bonds exceeded the supply by more than 13-fold.
OK then! Because that was just the beginning: The reconstruction instrument “Next Generation EU” will be used in the years 2021 to 2023 and will finance investment and reform projects. It will help ensure that the EU member states do not drift further apart economically after Corona.
Investors are looking for “safe havens”
To finance this, the European Commission will raise up to 750 billion euros in the financial markets on behalf of the EU – making it one of the most important players in Europe’s bond markets.
“Next Generation EU” is to provide the member states with 390 billion euros in grants that do not have to be repaid, and 360 billion euros in loans. For the first time, the EU has borrowed money in such a large volume from the financial markets. The massive demand for the first Covid-related EU bonds shows that investors are looking for “safe havens”. With the EU as debtor, they are ready to accept negative interest rates.
This demonstrates the immense potential of bonds the EU issues on behalf of all member states. This should also be used for future EU investment programs to deal with future problems such as climate change and digitization.
Exactly how much money the EU will borrow for the building-up instrument in the financial markets remains open: It is not clear whether all countries will make full use of the available “Next Generation EU” loans that they have to repay.
The governments in Madrid and Rome would like to avoid the conditions attached to EU loans. This is due to the negative experiences of the South with the austerity conditions of the Troika from the time of the euro crisis.
At the end of last year, there were discussions in the ECB as to whether the central bank’s bond purchases should be reduced for those countries which are not exhausting the available EU loans from the “Next Generation EU”. However, that would be a dangerous game that the ECB should refrain from: It would lead to speculation and turbulence in the financial markets that Europe doesn’t need now.
More: The solution to the EU budget dispute is a masterpiece of Merkel
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