If an EU member state wants to borrow money, it usually does so itself, through government bonds. Strong economy? Low interest rate. Weak economy? High interest rate. With Eurobonds, the EU does it collectively: one loan, for which all member states jointly guarantee. This makes borrowing cheaper for countries with high sovereign debts, but the risks are shared.
Since the corona crisis, it is no longer a theory: in 2020 the corona recovery fund was rigged, good for some 750 billion euros. Eurobonds have not been an abstract idea since then, but more real than ever. Just recently, the European Commission raised another €5 billion or so through a bond auction, with maturities up to 2042. This auction is part of the broader financing program set in motion since the corona recovery fund. That tension is topical again, with EU ministers approving the new €150 billion European defense fund in late May. This fund, like the corona recovery fund, will be financed entirely through joint loans, or eurobonds.
But why is there so much discussion? The Netherlands is traditionally frugal. Not out of unwillingness to show European solidarity, but out of concern for financial discipline. As also noted in Trouw, there is concern in the Netherlands that Eurobonds encourage countries with high debts to borrow even more, without direct consequences. After all, the incentive of the capital market, higher interest rates for risky policies, may disappear if everyone guarantees together.
So what are the benefits? For countries like Italy and Greece, the corona recovery fund meant direct access to low-cost 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, it positioned the EU as a strong player in the global market, something that Commission President Von der Leyen's new defense plan reiterates. Together we are stronger is thus the thinking. It also makes economic sense, joint loans yield lower interest rates. In view of geopolitical uncertainty, the changing role of the U.S. as a partner of Europe, for example, rapidly available capital for strategic autonomy, for example, is important.
So what are the risks? The European Court of Auditors was particularly sharp about the corona recovery fund this spring. In a scathing report, it stated that there was little visibility into where the money was going or what it was delivering. Fraud investigations in Italy, shadowy iPad purchases for school children and overcompensation for sustainability are no exceptions. Even the Netherlands, which submitted its plans late, now risks losing money because of lagging reforms.In addition, the corona fund was partly based on subsidies, which never return. The current plan for defense works differently: member states borrow directly from Brussels and pay back. Less risky in theory, but if one country does not repay its debt to Brussels, other countries, such as the Netherlands, still pay for the damage.
So the eurobond has long since ceased to be a vision of the future; it is a reality that we must deal with. Given international developments, the instrument will probably be used more often, whether you are for or against it. Therefore, the real question is not whether we use Eurobonds, but how. What we can learn from the Coronation Fund is that you cannot build on shared debt without shared responsibility. Without transparency about spending, goals and performance, and clear accountability in the shared system, the system loses its legitimacy, and thus support.
In addition to just the money for defense spending, it is important to also have a strong defense industry where the money can actually be spent. Among other things, we will discuss this at the event that Castro is co-hosting with American Chamber of Commerce in the Netherlands (AmCham) on June 23 leading up to the NATO summit in The Hague, here State Secretary of Defense - Gijs Tuinman and former NATO Secretary General, Anders Fogh Rasmussen, among others, will come to speak.
Wil je meer weten of hier verder over praten? Neem dan contact op met Roel Yska (roel@castro.lu).