When NextGenerationEU was agreed in 2020, European Commission president Ursula von der Leyen greeted it as a "historic agreement".
The plan to raise funds and provide up to €724bn in grants and loans to member states struggling with the economic and fiscal impact of the Covid pandemic was in many respects pathbreaking for the EU’s public finances.
It also paved the way to large-scale European Union (EU) borrowing operations.
Since 2020, the Commission has borrowed over €450bn. In addition to NextGenerationEU, the Commission has funded the SURE programme during the Covid pandemic and much-needed financial assistance to Ukraine.
As of this year, only four of its member states have more debt outstanding than the EU itself.
Though such borrowing operations have a long history, they are unprecedented in scale and pose new challenges for both EU debt management and financial accountability.
Thanks especially to the European Court of Auditors, we are becoming increasingly aware of the many problems linked to the operation of the Recovery and Resilience Facility (RRF), the centrepiece of NextGenerationEU.
Published earlier this month, the court’s annual report for 2023 highlights that "around one third of the RRF’s grant payments did not comply with the rules."
And that concerns just the irregularities on the commission’s side — national disbursements are audited by national auditors.
There are already plenty of examples where RRF funding has gone to white elephants and other badly designed programmes, or been lost to corruption.
One problem that has bedeviled the proper use of the EU’s borrowed resources has been the complex governance of the RRF.
The facility requires member states to meet agreed-upon milestones to receive funds. However, in practice these are often not clearly defined — as the investigations of the auditors have demonstrated.
Of course, it is foolhardy to expect completely effective spending — but such problems cast doubt over any proposals or future plans to harness the commission’s borrowing ability.
As much as the commission aspires to become a sovereign-style issuer, its ability to secure cheap funding in the long run remains uncertain
The commission’s borrowing operations have themselves become the source of much concern. Since 2021, the commission has operated a diversified funding strategy, which means that it has had more flexibility over when and how much debt it issues.
But over the course of 2022, the commission’s borrowing costs increased to such an extent that the EU budget had to be revised twice to ensure enough money for interest payments.
In the mid-term revision of the Multiannual Financial Framework (MFF), agreed earlier this year, the resources for interest payments were bracketed out of the MFF to protect other spending priorities.
What is more, it remains difficult to say whether the commission is doing a good job at managing its debt. Although a Court of Auditors report from last year reached broadly positive conclusions and the commission’s borrowing costs have come down in recent months, the EU’s bonds are not considered equivalent to sovereign bonds.
As much as the commission aspires to become a sovereign-style issuer, its ability to secure cheap funding in the long run remains uncertain.
A big question lurking behind all the commission’s borrowing operations is, however, how they are guaranteed in the Union’s budget.
For example, to repay the borrowing for the grants handed out under the RRF, member states will have to send money to Brussels in addition to their annual budget contributions. Only one of the three planned new 'Own Resources' to pay for the RRF grants has so far been adopted.
Moreover, the commission might already be exploring ways to delay the repayment of RRF debt that is scheduled to begin in 2028. While borrowing has been the easy part, servicing this debt might prove politically tricky.
The EU’s aid to Ukraine has created another long-term risk on the EU’s balance sheet.
Recent loans to Ukraine under the MFA+ in 2023 and the Ukraine Facility in 2024 were so large and risky that they could no longer be guaranteed through the EU budget.
By guaranteeing these loans under the Own Resources ‘headroom’, member states are effectively shouldering the risk that Ukraine might not repay in full its more than €33bn in debt. Under the terms of the EU’s loans to Ukraine, it likely will not be until 2033 that these risks materialise.
However, the need to write off some of the EU’s loans to Ukraine is likely.
A few years ago, it would have been unimaginable that the EU could borrow to finance grants to member states, or that it could emerge as the largest international provider of financial support to Ukraine. Yet, this rapid rise in EU borrowing has created considerable risks to the EU’s public finances.
To prove itself as a credible borrower — perhaps gain the status of a sovereign-style issuer — and even to expand its borrowing powers, the EU must do more to tackle these risks head-on.
David Howarth is professor at the University of Luxembourg and co-director of the Banking on Europe research project focused on EU borrowing institutions and instruments. Lukas Spielberger is a post-doctoral researcher at the Vrije Universiteit Brussel.
David Howarth is professor at the University of Luxembourg and co-director of the Banking on Europe research project focused on EU borrowing institutions and instruments. Lukas Spielberger is a post-doctoral researcher at the Vrije Universiteit Brussel.