At the European Union Summit in Brussels on March 6, the 26 member states decided to mobilize about 800 billion euros (867 billion dollars) for what the leaders described as necessary for “arming Europe”. European Commission Chairman Ursula von der Layen was commissioned to soon be assigned how members help to finance their share in this effort.
At the present time, the European Union countries seem able to finance about 650 billion euros of the 800 billion euros package by issuing their sovereign debt, rather than the joint borrowing of the European Union.
It is expected that the remaining 150 billion euros will help in guaranteed loans through the European Union’s budget, which would bring the bloc to a step to the concept of common debt.
Unlimited debts
In Germany, Ferdrich Mirz’s adviser has already got rid of a talisman that is not permissible from the election campaign, and is now defending the unrestricted borrowing to finance the national defense efforts, although a new talisman “whatever it is,” he recently said.
To encourage other European Union countries to follow a similar approach, Von Der Leyen wants to activate what he called “the condition of escape”.
“This will allow member states to significantly increase defense spending,” she said. At the Munich Security Conference in February.
Jurgen Mattis, who heads the International Economic Research Unit and Economic Expectations at the German -based Economic Research Institute (IW), believes that the condition of escaping from von der Lin can help the European Union member states make their defense expenditures compatible with marrow stability and growth growth.
Since 1998, the agreement is limited to a limit between the year 60 % of GDP and limited the budget deficit by 3 % for the 20 countries that are currently using the euro. However, it was originally aimed at preventing excessive national borrowing, many eurozone countries have broken the principle over and over again.
If these countries need to obtain additional debts to finance their military needs, it is possible that Brussels will turn to their end instead of imposing sanctions, as they did in the past.
The interest rate is spread as a warning signal
Inside the European Union, the most entertainment of governments may give more financial space to maneuver, but whether the financial markets will be convinced still can be seen. Financial market investors focus primarily on the country’s credit wall, which is reflected in the classifications set by specialized agencies. The bad classification makes borrowing more expensive.
Among the eurozone countries, Germany pays the lowest interest rates on its debts. The difference between German interest rates and those in other countries are called “spread”. For example, Italy must pay a risk allowance of 1.2 per
At the beginning of the sovereign debt crisis in the European Union in 2010, the gap was smaller, but soon rose to nearly five percentage points. For Portugal and Greece, the installment was higher.
The higher the interest rate, the lower the country in other priorities, such as investments, education or pensions. These imbalances to the euro area prompted the brink of collapse during the debt crisis.
Mattis told DW that the impact of the new debts related to the defense on the spread “is not yet clear.” The threat of the euro region’s individual states will not exclude more than they can bear under armament efforts.
Is it time for Europonds?
Large expenses come with great risks-is this the moment for joint borrowing through the so-called Europonds?
The concept is simple: If European countries take debts together, the conditions will be more suitable for most countries than if the debts are released individually. They will benefit from the strong credit ratings of the richer member states. Rich countries, like Germany, will yet be responsible for the total debt collected through the European Union’s joint debts.
The issue divided the European Union for many years, with more or less the rift line operating along the axis from the north and south. Northern countries – including Germany, Austria, the Netherlands and Finland – accuse southern countries such as France, Italy, Spain, Portugal and Greece of financial responsibility and refused to support their debts.
The European Union Law also prohibits another country. Article 125 of the European Union’s action treaty explicitly stipulates this restriction.
To use Eurobonds to finance defense, it will be necessary to modify the European Union treaties. Such a change will not only take a long time, but also requires consent unanimously, which raises doubts about his feasibility.
However, the European Union has already tried collective borrowing, albeit with limited responsibility.
For example, the Recovery Fund of 750 billion euros, which was created during the Covid-19 pandemic in 2021, represents the first time that the European Union was collectively taken debt. In this case, the responsibility was limited to the share of each country of the European Union – which means that Germany was responsible for about a quarter of the total amount.
Likewise, the so-called European stability mechanism (ESM) and its predecessor, the European financial stability (EFSF)-both rescue boxes to help in the countries of the eurozone during the 2010 sovereign debt crisis-were forms of common debt.
Necessary, unlikely, or practical?
“If the joint borrowing will be necessary,” Matisse said from IW.
The Munich -based IFO head, “Munich’s IFO president, is” very unlikely “to finance defense spending through shared debts.
“This tool is not appropriate because defense expenditures are national expenses, and the European Union will first need to develop the concept of defense policy. But at the present time, urgency is priority.”
But Jens Boysen-Hogrefe from the KIEL Institute for Global Economy (IFW) sees that joint debts are “practical” when financing joint military initiatives. In an interview with DW, he asked whether “all European Union countries will fulfill their obligations to joint defense in the coming years.”
Boysen-Hogrefe believes that the joint borrowing of defense in Europe should also include countries other than the European Union such as Britain and Norway to ensure that decisions are not presented to the principle of consensus in the European Union. This would prevent countries like Hungary from using the veto to prevent progress. In addition, the European Investment Bank (EIB), owned by the European Union member states, can play a “major role”.
Currently, the details of how Europe finances its armament remains unclear – just like whether Friedrich Mirz will reconsider his fixed opposition to shared debts.
In September last year, Mirz said he would “do everything in my sacrifice” to prevent the European Union from “entering the cycle of debt.” He did not respond to DW request to comment on whether his position has changed.
This article was originally written in German.