12 September 2024

FT: Brussels explores Draghi option of extending up to €350bn in EU debt

EU officials are examining ways to roll over hundreds of billions of euros of Covid-era bonds in order to avoid the bloc’s common budget being overwhelmed by repayment costs. Such a move, backed as an option by former Italian premier Mario Draghi, would extend as much as €350bn of unprecedented pandemic-era EU borrowing, according to people familiar with the issue.

Discussions are at an early stage over how to design a solution that would overcome staunch opposition from capitals such as Berlin and significant legal constraints, as well as win over investors. But officials in Brussels fear the repayment costs, if unaddressed, could hobble the EU’s spending power in coming years.

Draghi warned in a report this week that the looming obligations — and the unwillingness of EU states to give Brussels revenue-raising powers or more money — left the EU facing a debilitating budget crunch. The looming squeeze is already a significant factor for the commission as it prepares its proposal for the EU’s next long-term budget, which is facing myriad spending demands for the 2028-2034 period.

Commission insiders estimate that from 2028 the EU will be facing debt repayment and interest costs of as much as €30bn a year — a sum corresponding to around a sixth of the union’s current annual spending. “If you do nothing else, you will shock [member state] contributions or cut the existing budget,” said an EU official, speaking on condition of anonymity to discuss confidential talks. Rolling over the debt “makes perfect sense”, said a second EU official.

Draghi, who presented a 400-page report on the future of the EU economy this week, floated the idea of prolonging the pandemic-era debt as a way to release more investment funding for an EU-wide investment gap of some €800bn a year. “Member states could consider increasing the resources available to the commission through deferring the repayment of [NextGenerationEU],” he wrote. The option is seen favourably by some top EU officials but it would need political backing from all 27 EU member states, which underwrote the pandemic-era EU borrowing on the basis that it would be a one-off and time limited. “Germany would not agree to that . . . It would be a complete non-starter”, an official said, adding that renewing the borrowings would add to interest costs and raise questions about the credibility of the EU as an issuer.

Under the NextGenerationEU programme, EU states have drawn down around €94.6bn in loans to date, which they are responsible for repaying from 2031. Meanwhile, around €171bn has been disbursed so far by the commission in grants, a sum that could increase to €357bn. Borrowing for these grants is scheduled to be repaid directly from the EU budget between 2028 and 2058. The commission could potentially issue bonds to refinance outstanding debt that funded NextGenerationEU grants. But all debts would need to be repaid by 2058. A commission spokesperson said the profile of repayments would be decided in the EU’s long-term budget negotiation....

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