EU to Consider Massive Joint Bond Sales to Fund Energy, Defense

EU to Consider Massive Joint Bond Sales to Fund Energy, Defense

The European Union is discussing a plan to jointly issue bonds on a potentially massive scale to finance energy and defense spending as the bloc copes with the fallout from Russia’s invasion of Ukraine.

The proposal may be presented after the EU’s leaders hold an informal summit in Versailles, France, that starts Thursday, according to officials familiar with the preparations. Officials are still working out the details on how the debt sales would work and how much money they intend to raise, depending on the guidance they receive from leaders in this week’s meeting.

The spread between 10-year Italian and German yields -- a key gauge of risk in the region -- tightened 11 basis points to around 150 basis points, on course for its biggest drop since 2020. Yields on EU bonds rose on the prospect of increased supply. The euro rose as much as 0.6% to $1.0922 following the news.

A senior EU official said Tuesday afternoon that there was no formal plan from the European Commission, the bloc’s executive arm.

“We have no such plans in the commission,” commission Vice President Frans Timmermans said in a news conference when asked about the Bloomberg report. “I don’t know if there might be in some member states.” 

In a subsequent appearance on Bloomberg Television, Timmermans said any specific proposal would depend on what France, which holds the EU’s rotating presidency, puts forward. “I’m sure that our leaders will come back to the issue of financing also next Thursday and Friday because it’s clear to me that this enhanced energy transition that we will now be going through, the need to revisit strategic choices we need to make,” he said.

EU to Consider Massive Joint Bond Sales to Fund Energy, Defense

Europe’s strong response to Russia’s invasion of Ukraine “in spite of large costs to its own economy makes us optimistic that joint fiscal support will follow,” Bank of America Corp. economists led by Ruben Segura-Cayuela wrote in a note to clients on Tuesday. This week’s summit “is unlikely to deliver an actionable outcome, but signals a debate is ongoing,” they said.

The potentially extraordinary move comes just a year after the EU launched a 1.8 trillion-euro ($2 trillion) emergency package backed by joint debt to finance member states’ efforts to deal with the pandemic. Now, the bloc faces massive financing needs as it begins to reform its military and energy infrastructure following the Russian attack.

‘New Tools’

Any move to allow the EU’s executive to issue joint debt on behalf of the member states would require their unanimous approval.  

“We have to find new tools to address new issues this crisis raises in front of us,” the EU’s commissioner for the economy, Paolo Gentiloni, said Monday evening to lawmakers in Strasbourg, France. He added that he thought EU leaders would give political guidance on further moves at the summit. 

A European Commission spokesperson earlier declined to comment on the specifics but said officials continue to monitor the situation and are ready to react to the changing circumstances.

EU to Consider Massive Joint Bond Sales to Fund Energy, Defense

The plan would involve the commission, the bloc’s executive arm, issuing bonds and then channeling the proceeds to member states in the form of concessionary loans to finance spending in the areas, according to the officials who asked not to be identified because the plans are private. 

One option is to structure it like the bloc’s SURE program, some of the officials said, referring to a scheme that was used to finance employment support initiatives in the aftermath of the pandemic, under which member states repaid soft loans provided by the commission. 

Energy, Defense Spending

The invasion has forced the bloc to rethink its most basic energy needs, as more than 40% of EU gas imports and one quarter of its oil come from Russia. On Monday, Moscow threatened to cut gas supplies to Europe via the Nord Stream 1 pipeline. But as the EU transitions away from Russian gas, it will have to turn to other, more expensive, sources.

While the bloc can still boost imports of liquefied natural gas from countries such as the U.S., such purchases will be more expensive. And refilling storage to an average level will be challenging due to soaring prices: The price tag could reach 70 billion euros compared with 10 billion in previous years, according to a report by Belgian-based think tank Bruegel.

“The impact on energy prices from recent events and the importance of energy considerations in sanctions discussions could motivate lawmakers on both sides of the Atlantic to accelerate the shift to renewable energy,” Goldman Sachs Group Inc. economist Alec Phillips wrote in a note to clients on Monday. “EU leaders are expected to release a proposal in coming days in this area.”

The EU has also had to rethink its defense strategy, as it has typically relied on the protection of the U.S. through its commitments in the NATO alliance.

“Tens of billions of euros will be needed to strengthen European defense, to not rely on the U.S. and to be self-sufficient in energies, to be independent of Russia,” Slovakia’s finance minister, Igor Matovic, said on Tuesday. “Joint EU bonds are the way to go -- Slovakia will surely need a helping hand from richer European countries, we can’t do it ourselves.”

Germany has made a historical about face and pledged to ramp up military outlays, with Europe’s largest economy set to spend 100 billion euros to modernize its army. German Chancellor Olaf Scholz said that from now on, Germany will hit a NATO target of allocating at least 2% of gross domestic product to defense, he told lawmakers in Berlin, a goal the country has consistently failed to meet.

If non-U.S. members to the North Atlantic Treaty Organization seek to reach the 2% threshold, they would need to increase defense budgets by 25%, according to a research note by Jefferies.

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