Southern Europe will regret not taking EU loans now

More than any crisis in recent years, COVID-19 has focused Europe’s attention on the need for a unified and collective call to financial action. As a result, the European Central Bank (ECB) unleashed powerful monetary stimulus earlier in 2020, helping member states to finance a big fiscal response, while EU leaders took an unprecedented step toward fiscal integration with a new €750 billion jointly funded facility for investment loans and grants to member states, known as the Next Generation EU project.

Lately, however, that progress has been disrupted by the complacent refusal of some of the most indebted member states to participate fully in the rescue. Because of unfounded concerns over “reform conditionality,” several countries in Southern Europe are refusing to apply for any loans from Next Generation EU. Spain, Italy, and others seem oblivious to the peril to their own finances. Their obstinacy makes the ECB less likely to continue to purchase large amounts of their sovereign bonds, which in turn will cause their rates to rise, resulting in the very budget pressures they fear.

The EU has begun raising the hundreds of billions of euros for postpandemic recovery grants. The European Commission has offered €17 billion in new 10- and 20-year debt. Private investors have signed up a staggering €233 billion, despite –0.24 percent negative yields for the 10-year bonds and barely positive 0.13 percent for the 20-year bonds. This successful sale benefited from the forceful presence of the ECB in the markets (it can buy up to half of all EU-issued bonds). Most importantly, the interest rate achieved by the EU is below what Spain, Italy, Greece, and Portugal enjoy, despite their already historically low debt costs.[1]

The EU’s ability to borrow money at lower costs than the already low borrowing costs of Southern European countries means these EU members could still save money by participating in the €750 billion Next Generation EU package.

In contrast to the more innovative investment grants agreed by EU leaders, loans financed via EU-issued bonds will have to eventually be repaid by the recipient member state, counting toward its national sovereign debt, Each member state has to carry the same debt burden, but it does save on interest rate costs. The Spanish and Portuguese governments’ resistance, along with possible opposition by the Greek and Italian governments, constitutes a serious political mistake.

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