Spain pushes EU for €850 billion annual joint debt

BRUSSELS — Spain is pushing the European Commission to break a long-standing taboo and borrow an additional €850 billion per year on behalf of EU countries.

The Spanish proposal, contained in a discussion paper circulated to countries seen by POLITICO, is set to inflame tensions during a meeting of eurozone finance ministers on Thursday, where Economy Minister Carlos Cuerpo is expected to lay out his pitch.

The idea of EU common debt is among the most controversial for governments, pitting pro-spending countries in Southern Europe, such as France and Spain, against a critical Northern bloc led by Germany and the Netherlands.

In an attempt to bridge the divide, Spain said its proposal — built on the premise that more EU borrowing would make interest repayments cheaper — could save countries up to €5 billion per year initially by lowering interest repayments and €25 billion in the long-term.

The idea is that highly indebted EU countries could profit from the European Commission’s lower borrowing costs, freeing up billions to spend on domestic priorities.

Germany’s worst nightmare

The EU launched its first joint debt program in 2021 after agreeing to issue up to €750 billion in grants and loans to tackle the economic slump caused by the Covid-19 pandemic.

Since the Eurozone crisis in the 2010s, Germany and the Netherlands have consistently opposed plans for the Commission to permanently issue debt on behalf of countries. They allowed the post-Covid program only because it was a one-off.

Even though the Commission enjoys the highest Triple A credit rating, its borrowing costs are comparatively high because its debt issuance is perceived as temporary and it is not classified as a sovereign issuer in debt markets.

With relatively low debts and strong credit ratings, Berlin and The Hague have nothing to gain from the Spanish initiative, as they can borrow at a lower cost than the Commission under their own name.

To win them over, Spain has proposed compensating the additional costs that they would incur from EU joint debt via a new financial mechanism, called the European Sovereign Facility (ESF), which would allow the Commission to issue debt on behalf of EU countries and channel the funds via loans.

The paper argues that significantly higher debt issuance will reduce the risk premium that investors demand from the Commission.

“Over time, the resulting increase in liquidity would be expected to lower the EU’s funding costs to levels close to — or potentially even below — those of Germany, generating savings for participating countries,” the proposal reads.

Spain wants the new system to start once the bloc’s next seven-year budget comes into force in 2028 and be limited to countries that abide by EU fiscal rules. If all countries and the European Stability Mechanism, the Eurozone's bailout fund, were to participate, the ESF could raise to €850 billion per year, it wrote.

However, Berlin and The Hague’s involvement — which will be hard to obtain — is seen as crucial to lend economic credibility to the scheme.

"We all know that eurobonds are a non-starter for a number of Member States. This will go nowhere," said an EU diplomat, granted anonymity to speak freely.

While membership would be voluntary, the participation of the eurozone’s five largest issuers — Germany, France, Italy, Spain and the Netherlands — is necessary for the initiative to take off, according to the proposal.