Loans - the financial bomb from the EU budget

The loans contracted by the European Union will represent in the coming years a real bomb from the community budget that will have to be defused by the decision-makers in Brussels, claims Nicolas-Jean Brehon, budget advisor of the Schumann Foundation and in an editorial published in Le Figaro honorary adviser of the French Senate.

Nicolas-Jean Brehon says: "Since the beginning of the Ukrainian war, all the old barriers that guaranteed budgetary rigor in the European Union have been broken. In the last 50 years, the finances of the European Union have represented a model of budgetary orthodoxy. A balanced budget, planned expenses, respected ceilings. No debts, no slips. However, with a budget limited to 1% of the gross national income (GNI), the EU could hardly become a real international economic actor, (...) because the amount it has to repay for the contracted loans amounts to 800 billion euros, to which will be added a part of the 486 billion euros needed for the reconstruction of Ukraine according to the World Bank's estimate".

The cited source shows that following the pandemic, the EU borrowed on the capital markets under favorable conditions to finance national recovery and resilience plans through the NextGeneration EU program. It is about the 750 billion euros that were offered to the member states, either in the form of loans (386 billion euros) or in the form of grants (338 billion euros). Nicolas-Jean Brehon reminds that both the loans and the grants granted are financed by the European Union through the issuance of European bonds, an issuance that represented real success, the bonds being mostly oversubscribed, showing the confidence of the financial markets in the European signature. The budget advisor of the Schumann Foundation states that, encouraged by that success, the EU repeated the operation, lending 94 billion euros to finance the anti-unemployment program SURE and 40 billion euros for the guarantees granted through the Global Gateway for investments of 300 billion euros.

Then, in the first two years of the war in Ukraine, the EU institutions in Brussels adopted five financial assistance programs totaling 75 billion euros, and in April 2024 they granted a loan of 4 billion euros for the Balkan EU candidate states.

Nicolas-Jean Brehon states that at the moment "ceilings and programming have become haphazard" at the EU level and that "more and more expenditure is financed outside the ceilings or even outside the budget".

The EU's main lever of intervention is no longer subsidies, but loans, which are easier to implement. The French specialist estimates that the amount of loans contracted by the EU amounts to 800 billion euros, to which will be added a part of the 486 billion euros needed for the reconstruction of Ukraine, and in this way the threshold of 1000 billion euros borrowed by the community block will be exceeded from the international capital market.

In most cases, these loans are long-term (often 35 years) with grace periods, and repayments are staggered over the years 2022-2070. Repayments of the main loans to Ukraine are postponed after 2033.

Nicolas-Jean Brehon specifies: "But what would happen if these loans were not paid by the member states or by Ukraine? Who can guarantee that Ukraine will repay the 80 billion euros received from the loans contracted by the European Union (in addition to the bilateral and international loans and before the reconstruction loans)? This is where the issue of warranties comes into play. (...) In the new financial assistance schemes it is generally accepted that 70% of the loans are guaranteed with shared responsibility between the EU budget and the member states. A largely artificial sharing, since it is the Member States who, in reality, finance the largest part of the EU budget".

The French expert claims that this guarantee will be useful in the future, because financial exposures involve variable risks, risks that in the case of Ukraine are "extremely high", according to Ambroise Fayolle, vice-president of the European Investment Bank. The cited source states that, in the case of Ukraine, it is very likely that the member states will have to assume responsibility, directly or indirectly through the EU budget, a budget consisting of 22% of Germany's contribution and 17% of France's contribution.