Brussels In the Ukraine war and in the fight against the energy crisis, the EU mobilized billions – and thinned out its own budget. Now there is another stress factor that could significantly exacerbate the tight budgetary situation: the rising interest costs for the Corona reconstruction fund.
A study by the Brussels think tank Bruegel for the European Parliament calculates that the EU’s interest payments could increase from 15 billion to 30 billion by 2027, the year in which the recovery fund expires. Other EU programs are likely to suffer as a result. Because the reconstruction fund is structured in such a way that the interest payments are paid from the EU budget.
Affected are items that appear under the same category in the EU budget, such as the Erasmus Plus student exchange and training program and the European Social Fund, which finances training activities.
The “Next Generation EU” recovery fund was decided during the pandemic to stimulate the recovery of the European economy with future investments in the green and digital transformation. For the first time, the EU Commission was able to issue bonds on a large scale for financing purposes.
When the fund was conceived, investors demanded extremely low interest rates, and the expected borrowing costs were estimated to be correspondingly low. But now the situation has changed: the rapid rise in inflation has forced the European Central Bank to change course.
Key interest rates weigh on the budget
The ECB has gradually increased the key interest rate in Europe to 3.75 percent, as a result the financing costs of the reconstruction fund also increased. As a result, interest payments could account for around 5.3 percent of the EU budget in 2027.
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“Commission chief Ursula von der Leyen has gambled away,” says MEP Moritz Körner (FDP). “It’s a slap in the face for taxpayers that financing the EU debt is likely to be twice as expensive as the Commission plans.”
In total, the reconstruction fund includes 750 billion euros, which will be distributed partly as grants and partly as loans to the EU member states. By the end of 2026, the Commission still has to place bonds worth 421 billion euros on the markets.
Since interest rates fluctuate, financing costs can only be estimated. The actual burden could be greater or less than the 30 billion euros forecast in the study – depending on how the market environment develops.
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includes the EU Corona Recovery Fund.
Interest rates for the EU have recently risen more sharply than for national governments. However, this does not mean that investors had any doubts about the Commission’s payment practices. The creditworthiness of the EU is beyond question, according to Brussels. Supranational organizations like the EU generally paid more for their bonds than nation states.
EU is a big player in the credit market
For a long time, the Commission was only a niche issuer of bonds, but with Next Generation EU, the Commission has become a major player in the credit market. Only Germany, France, Italy and Spain are currently borrowing more money from investors.
The Commission intends to use this weight even more in the future to reduce its borrowing costs. It helps that the ECB has decided to treat EU bonds like government bonds, for example when it demands collateral from banks.
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However, the tense budget situation will not be overcome with such financial maneuvers. The reserves provided for in the EU budget have almost been used up because of the Ukraine war and the energy crisis. The special thing about the EU budget is that it is fixed not for one year, but for seven years. That is why it is called the “Multiannual Financial Framework”.
The current financial framework comprises a little more than one trillion euros and is valid from 2021 to 2027. Around 80 percent of the expenditure is firmly planned, for example for the common agricultural policy or the cohesion fund, which is intended to align the economic power in the EU. What is lacking in this structure is the flexibility to respond to crises.
In the coming weeks, the Commission therefore wants to initiate a “review” of the EU budget. EU budget commissioner Johannes Hahn is currently touring the member states to find out whether there is a willingness to increase the budget.
Controversial debates are already emerging. While the southern countries, as net recipients of EU funds, are in favor of a budget increase, Federal Finance Minister Christian Lindner is unlikely to be willing to transfer more money to Brussels.
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