Joint borrowing is dividing Europe from within

Eoin Drea is senior research officer at the Wilfried Martens Centre for European Studies.

The European Union’s €800 billion recovery instrument (also known as #NextGenerationEU) was supposed to represent an unprecedented joint response to the Covid-19 pandemic — a transformative moment of deepening EU integration and a first step toward a fuller economic and political union.

Alas, these dreams — much like European solidarity with Ukraine — have quickly given way to more grubby political realities.

True, as an exercise in soaring rhetoric, #NextGenEU continues to be an outstanding success. It has been touted as a “once in a lifetime chance to emerge stronger from the pandemic, transform our economies and societies, and design a Europe that works for everyone.” In the eyes of French President Emmanuel Macron, it is a vision of Europe meeting its “moment of truth,” and in the bombastic words of wannabe MEP (but also still technically) European Council President Charles Michel, “We did it. Europe is strong . . . Europe is united.”

No pressure …

Unfortunately, the events of the past three-and-a-half years have shown that rather than strengthening European solidarity, the recovery fund has actually supercharged internal political divisions and made further integration less — not more — likely in the years ahead.

In fact, the EU’s newly discovered love of fiscal firepower has begun to infect the political consensus required for grander priorities, including financing Ukraine, agreeing on the bloc’s long-term budget and ensuring respect for rule of law in Central and Eastern Europe.

Essentially, this #NextGenDisaster is dividing Europe from within in three distinct ways: For one, the recovery fund has shredded the EU’s credibility on fiscal discipline. Even though it was agreed on in July 2020, at present, no political agreement on how to pay for this great transformational tool exists. And the increased EU revenues (“own resources”) required to repay the grant portion of the borrowing currently only comprise larger national contributions for recycling plastic bottles!

Moreover, a broader agreement on the much more important sources of cash needed remains unlikely before 2026. The EU is, in effect, running a mounting budget deficit, and the fiscal situation is so bad, the European Commission is now looking for “bailouts” from member countries through additional “top-up” budget contributions.

So much for the EU practicing what it preaches on fiscal discipline.

Second, there’s the fact that the recovery fund has been clearly used as a pretext to establish a debt market for EU bonds. The bloc’s ongoing borrowing binge is a textbook example of creating so much debt that the development of associated markets becomes a quid pro quo. And at this rate, debt servicing costs for EU borrowing in 2024 are expected to be double their original estimates, while the bloc’s stock of debt is set to reach nearly €1 trillion by 2026.

Unfortunately for European citizens, we’re the ones who will ultimately pick up the tab.

The EU’s newly discovered love of fiscal firepower has begun to infect the political consensus required for grander priorities | Ralph Orlowski/Getty Images

Let’s be honest — the recovery fund was never about Covid. It’s simply a deeper, more expensive Europe dressed up as solidarity.

Third and finally, there’s the reality that this facility was always going to be way too slow to be a real post-pandemic stimulus tool. As of November 2023, only 35 percent of grants and 15 percent of loans had been disbursed — that’s under 25 percent of the planned investment package. Worse still, the recovery fund has spawned a whole new level of bureaucratic Brussels oversight, replete with scorecards, milestones and interactive maps. Yet, beneath the razzle-dazzle, serious economists acknowledge that its management falls short against performance-based funding standards.

Meanwhile, the recovery fund has also attracted warranted criticisms regarding the type of projects submitted by some member countries. And it isn’t an equal Pan-European effort either — Italy, Spain and Greece account for nearly 70 percent of existing grant disbursements.

Thus, #NetGenEU remains what it was always designed to be — a tool to shift member country borrowing to the EU level. And the frugal countries should be having serious buyer’s remorse by now, or at least drowning their sorrows at losing this battle back in 2020.

Politically, the predictable fallout is well underway. The facility is now just another financial pressure point in the ongoing battle over “rule of law” concerns in both Poland and Hungary. And as the fund’s long-term financial realities hit home, attitudes in key EU contributor countries — Finland, the Netherlands and Germany among them — will harden into political obstruction.

The recent election result in the Netherlands and Germany’s recommitment to its internal fiscal rules — despite its domestic political uncertainty — signal the beginning of a frugal fightback. But this time, they need to fight the right battle at the right time.

This fetish for “non-budget” debt finance will haunt the EU for decades to come. Just look at Berlin’s unfolding financial mess with its scary political implications.

Joint borrowing isn’t a requirement for a successful European economy. In fact, it’s a distraction from the real economic problems facing the bloc today. Refocusing on the single market, actually finishing the banking union, and perhaps turning the capital markets union into more than just a press release stuck on repeat would do more for European competitiveness than the recovery fund ever will.

I’ll leave the last word to the European Court of Auditors — the EU’s independent external auditor — which, in its 2022 Annual Report analyzing the bloc’s accounts, acknowledged it had “maintained an adverse opinion [of the budget] for the fourth consecutive year . . .We obviously just can’t keep borrowing money without having a plan in place [for] how it’s going to be repaid.”

The bloc’s recovery fund is a #NextGenDisaster wrapped in an EU flag. And this debt may well be the death of the integration process.