Brussels to seek more joint debt in EU budget plan

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The European Commission plans to propose a new joint debt instrument to tap capital markets in times of crisis, in a move that would give Brussels a permanent channel for issuance of EU-denominated bonds. 

The proposal, still at draft stage, describes a new mechanism that would raise debt to finance grants or loans to member states in a crisis, three people familiar with it have told the Financial Times.

This emergency mechanism would be part of the plan for the EU’s next multiannual budget from 2028, which Brussels is set to present mid-July.

EU countries would still need to authorise its use, but it would create a permanent basis for joint debt issuance, something countries including Germany, Sweden and the Netherlands have long resisted.

Berlin set out its red lines last month, and has ruled out more joint borrowing to fund grants to other member states. “Grants is a no-go for us,” said one person familiar with the discussion.

Sweden also made clear it is “opposed to EU borrowing for the purpose of financing grants” in a position paper seen by the FT. The Dutch government made a broader objection in its position paper, saying it was “not in favour” of common debt for “new European instruments”.

Given that agreeing on the common budget requires the unanimous support of all EU27 countries, using joint debt to finance handouts faces significant hurdles.

But EU borrowing to issue back-to-back loans is less controversial. It has already been used during the Covid-19 pandemic and more recently to issue €150bn in EU defence loans.

The proposal for more joint debt is part of Brussels’ efforts to design the EU’s next long-term budget to cope with a much longer list of spending demands.

Primarily financed from national contributions, the common budget is extending to cover priorities like defence and economic competitiveness, while at the same time finding room to repay pandemic-era recovery funds.

Most net contributors — the minority of countries that pay more into the budget than they drawn from it — are resisting increasing their dues or giving Brussels revenue-raising powers.

EU countries are also struggling to find additional funds to boost their security and defence, with Nato members recently agreeing to raise defence spending to 5 per cent of GDP.

These pressures have led some countries, such as Denmark and Finland, to leave the more fiscally conservative camp in favour of more common funding instruments for defence spending.

“It is not our policy that the budget should be increased, but we are not saying no beforehand because we realise that this might be a discussion because we are faced with enormous challenges in Europe,” said Denmark’s Europe minister Marie Bjerre. “We have war on our continent.”

Laura Dubois contributed reporting from Aarhus, Denmark.