Brussels The EU Commission has to accept a significantly higher interest burden, but does not see its AAA rating on the financial markets in jeopardy. This emerges from a letter from budget commissioner Johannes Hahn to MEP Markus Ferber (CSU), which is available to the Handelsblatt.
The credit rating of the EU is based on the capacities of all member states, including the five AAA countries Germany, the Netherlands, Sweden, Denmark and Luxembourg, wrote Hahn. The development in poorly rated AA countries such as France does not have a direct impact on the EU’s creditworthiness.
The reason for Ferber’s request was the downgrading of France from AA to AA- by the rating agency Fitch in May. The financial politician had expressed concern that the EU credit rating could now also be downgraded and the interest burden on the joint debts would then increase.
Financing EU debt has become significantly more expensive since the European Central Bank (ECB) hiked interest rates. According to the Commission, since the first issuance in June 2021, interest rates on ten-year EU bonds have risen from 0.09 percent to 3.2 percent in May 2023. By way of comparison, interest rates on ten-year German government bonds rose from minus 0.2 percent to 2.45 percent over the same period.
Ferber Hahn also pointed out that the first euro protective shield EFSF had already been downgraded – and asked whether the same was now threatening the Corona reconstruction fund “NextGenEU”. This distributes 800 billion euros to the member states to promote the green conversion of the economy. The fund is financed by EU bonds.
Hahn: EU funding is already significantly more expensive
Hahn explained that there is a difference between the EFSF and the Corona Fund. The EFSF is only secured by guarantees from the euro countries, which is why the downgrading of France has direct consequences for its rating. The protective shield is “less robust” – the corona fund, on the other hand, is guaranteed by the EU budget.
Ferber commented on Hahn’s letter of reply by saying that the Commission was “very naive on the way”. If a large state like France is downgraded, this will almost inevitably have long-term consequences for the creditworthiness of EU bonds, according to the CSU politician. The interest burden for the corona fund “literally exploded” compared to the Commission forecasts. This is already becoming a problem for the EU’s ability to act.
In fact, the interest rate development has torn new billions of holes in the EU budget. In the ongoing budget negotiations, the Commission is demanding an additional 19 billion euros from the member states just to cover the rise in interest rates up to 2027.
Commission calls for 99 billion euros
Overall, the authority calls for an additional 99 billion euros for the medium-term financial framework. EUR 50 billion is earmarked for Ukraine, including EUR 33 billion in loans to be repaid. That is why the Commission officially estimates its financial requirements at 66 billion euros.
With the exception of aid to Ukraine, several member states have flatly rejected EU demands for more money. After all, you also have to save in national budgets, argues Federal Finance Minister Christian Lindner (FDP).
It is therefore also questionable whether the entire sum for Ukraine will come from national budgets. Brussels is already considering covering part of it with new EU debt.
Hahn: Decide on fiscal rules this year
On top of that, the Commission is also demanding 15 billion euros for migration policy, 10 billion euros for green infrastructure – and a few billion for the increased interest burden and inflation compensation. In its forecast, on which the original budget planning was based, the Commission had assumed a gradual rise in interest rates to 1.15 percent. The rate is now three times as high.
The financial situation underpins “that we need to return to fiscal sanity both in Europe and in the member states,” said Ferber. “New debt cannot be the answer to every challenge.”
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Hahn explained that the proposed reform of the Stability and Growth Pact aims to improve the sustainability of public debt in the EU. It is therefore important that the member states reach an agreement before the end of this year. This is also “an important signal to the capital market participants”.
However, finance ministers are divided into two camps. Some, led by Lindner, are calling for debt rules to be as uniform as possible for all member states. The others, led by French Finance Minister Bruno Le Maire, want to give national governments more leeway.
At their most recent meeting, there was no sign of any rapprochement. An agreement this year is therefore considered questionable.
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