EU funds 12 September 2024, 9:37am

Mario Draghi report says EU interest burden needs to be deferred

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The European Commission is coming under increasing pressure to find a solution to deal with the debt accumulated during the Covid pandemic, which was used to finance the Recovery and Resilience Facility (RRF) programmes. The EU issued a significant amount of NextGenerationEU bonds during the pandemic, but its repayment obligations of nearly €360 billion threaten the EU's future budgetary room for manoeuvre.

Mario Draghi, the former Italian Prime Minister and former President of the European Central Bank (ECB), has proposed extending the debt of around €350 billion accumulated during the Covid era to avoid excessive budgetary pressures. According to European Commission officials, the repayment could be as much as €30 billion a year from 2028, equivalent to one-sixth of current annual EU spending, the Financial Times reports.

EU countries have jointly agreed to borrow during the pandemic under the NextGenerationEU programme. So far, some €94.6 billion has been borrowed, while

the Commission has distributed a total of €171 billion in subsidies, but the cost of repayments could rise to as much as €357 billion by the end of the programme.

The repayments are due between 2028 and 2058, but the Commission is concerned that if no solution is found, the EU's financial room for manoeuvre could be significantly reduced. One option is to extend the maturity of the debt, which could solve the immediate burden, but this would require political support from the 27 member states, including Germany, which is currently sceptical about the proposal.

Mario Draghi warned of an €800 billion annual investment deficit in the EU in his report this week. He suggested that member states should consider postponing debt repayments under the NextGenerationEU programme to free up more resources for future investment.

While the proposal has received a positive response at the highest levels of the EU, it faces serious obstacles, in particular from Germany, which sees the debt extension as contrary to the German constitutional court ruling. The court has previously ruled that the NextGenerationEU programme was a one-off and time-limited measure, so extending it would pose significant legal and political challenges for the EU.

One potential benefit of extending the debt that Draghi has raised is that EU bonds could become more attractive to investors. Currently, the EU bond programme is time-limited, which reduces investor interest. If the EU were to become a permanent issuer, this would ease investors' concerns and increase the attractiveness of EU bonds. However, this is also a political decision.

The EU's future financial stability and ability to invest will depend on managing its pandemic debt. Mario Draghi and the European Commission are proposing to extend debt repayments so that the EU's fiscal room for manoeuvre is not reduced. But achieving political consensus among member states and overcoming legal obstacles will be a major challenge.

Cover photo: Mario Draghi, former President of the European Central Bank (ECB) and former Prime Minister of Italy. Source: EU.

With funding from the European Union. The opinions and statements expressed herein are those of the author(s) and do not necessarily reflect the official position of the European Union or the European Commission. Neither the European Union nor the European Commission can be held responsible for them.