The EU’s appetite for borrowing is a slippery slope

"Europe’s new strategy of borrowing money on the capital markets risks transforming the bloc into a debt factory", says Johan Van Overtveldt, chair of the Committee on Budgets and the Recovery and Resilience Facility Working Group in the European Parliament in an opinion piece on politico.eu.

The COVID-19 pandemic had a huge impact on our economies, and it put millions of jobs at risk.

The European Union’s goal was to act fast and decrease the threat of massive layoffs. And it did so by quickly implementing the Support to mitigate Unemployment Risks in an Emergency (SURE) program — a temporary emergency instrument providing up to €100 billion in loans to member countries for new or existing job schemes.

Announced in April 2020, and fully implemented in December 2022, the SURE instrument is the predecessor to the current €723.8 billion Recovery and Resilience Facility (RRF), both of which are financed by raising money on capital markets — not through funds from the EU’s long-term budget, the seven-year Multiannual Financial Framework (MFF). And this new way of working is favored by the European Commission and most — but not all — member countries.

But while the RRF is still in its implementation phase, some member nations are already growing a new appetite for EU cash — and this is a problem for several reasons.

EU ambassadors are already discussing the possibility of a new European fund, financed with joint borrowing as a counterweight to America’s massive new green-transition industrial subsidies. And European Council President Charles Michel has the ambition to extend the SURE instrument “as a way to guarantee solidarity among member states, knowing that not all member states have the same fiscal capacities.”

Yet, at the same time, billions in the COVID-19 recovery fund remain unused and available for Europe’s member countries, with several EU agencies already warning that countries are having difficulties absorbing the huge amounts of money before the end of 2026. If member countries didn’t even fully absorb the previous MFF, why create a new borrowing instrument as countries struggle to spend the available recovery money?

Additionally, using the SURE instrument as an example for a new possible fund is the wrong approach.

The European Court of Auditors (ECA) made a preliminary assessment of SURE and concluded that after the disbursement of €98.4 billion, it is unable to evaluate how effective the instrument was and how many jobs were actually preserved. Informal contacts at the ECA say the lack of good national data and the instrument’s design structure make it difficult to evaluate.

In this context, it is also worth noting that all but one of the countries that used SURE have reported irregularities and alleged fraud. The Commission should not take SURE as an example, but instead view it as an opportunity to figure out how to evaluate its working methods more efficiently.

Finally, the EU’s new strategy of borrowing money on the capital markets to allow member countries to take cheap EU loans risks becoming a slippery slope, not least because the Commission seems unable to obtain competitive rates and debt conditions.

Providing another round of EU money through a new financial instrument isn’t the right solution here. And member countries should instead focus on reform to make themselves more competitive. Not doing so risks jeopardizing the EU project by creating a European debt factory.