The European Union has issued public debt for the first time, to finance the economic recovery investment plan after the Covid19 pandemic. This is a historic event, because until now the European Union had never been in debt, the member states were in debt. It is true that they had been proposed several times, for example in 2010 for the financial crisis in Greece.
In fact, as we commented in April 2020, Eurobonds were not a reasonable option. The market was not ready for them and the mechanisms were not ready, in addition to the fact that there was an alternative to financing at low cost in a situation of liquidity restrictions, the MEDE. However, the economic devastation caused by the pandemic and the various challenges that are emerging ** have led to other alternatives being considered. **
The Next Gen EU program
The Next Gen EU program arises as an idea to transform and reactivate the EU economy by investing in those sectors that could boost the economy in the coming years. The idea of Brussels is to use the crisis to make the European economy more competitive in the face of the rise of China and the US economy that has been leaving the European one behind for decades. In general, this focuses on two aspects: digitization (technological change) and sustainable or green technologies.
The investment program is 750 billion euros, of which the majority (672.5 billion) goes to the recovery and resilience plan. Of these 39 billion will be grants and the rest loans for the period 2021-2026. What is expected is the possibility of taking back the EU and making it “More digital, green and resilient” (yes, those three words that have been abused a lot lately).
Each country plans to use the funds in a different way, which must be approved by the commission. Germany France, Denmark, Italy, Spain, Poland, etc. Everyone has their plans and their priorities within the general lines of the EU. And how do you plan to finance this recovery plan? Mainly with Eurobonds. The debt is issued by all, so Spain obtains very advantageous conditions when going hand in hand with solvent partners such as Germany, Holland, Sweden or Estonia.
The bonds launched by the EU were agreed in July 2020, and the auction has come out this week. That is, as we already commented, Eurobonds couldn’t be launched overnight. The EU has issued bonds worth 20,000 million in their first issue, that is, there are still many issues to reach the 750,000 million that the EU will issue over the next few years.
The bonds are for ten years and pay an interest of 0.1% that, if we think about it, is below the inflation that the euro zone will probably have during the next ten years. Despite this, the EU has received a strong reception from the market, it has received a demand of 142 billion in its first issue, seven times more. Which is not bad considering that the EU is the first time it goes into debt in its history.
The issue has been rated AAA by Moody Fitch and DBRS. About 50% have ended up in Europe and 13% have gone to America and Asia. The EU plan is to continue issuing in the coming months. Another broadcast is planned for the end of June and another for July. The EU plans to issue € 80 billion in bonds this year and € 20 billion in bills. Starting in the autumn, they hope to also issue green bonds, for around 270,000 million euros.
The success of Eurobonds will depend on the reforms that are implemented
Is Eurobonds going to be a good idea this time? Surely it is something that will depend on the criteria that are executed to deliver the funds obtained to the different states and sub-national governments. If the money is given with little criterion, as the states want, it will only serve for the EU to go into debt as a whole without being of much use.
If clear and useful criteria are established, as well as a control mechanism, if clear priorities are established, not to save obsolete and bankrupt industries but to take a leap and is accompanied by measures that increase competitiveness, as a condition sine qua non To receive the funds, these Eurobonds and the consequent indebtedness will have been worth it.
Ask the readers Will they invest in Eurobonds? Do you think the funds will be put to good use?
More information | The Blue Bond Proposal
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