Before considering new debt, Europe should make full use of its common debt –

Rather than issuing new debt to cope with the economic consequences of the war in Ukraine and to build a “European defence”, the EU should transform residual loans from the Recovery and Resilience Facility into immediate transfers and grants to Member States, argues Jérôme Creel.

Jérôme Creel is associate professor of economics at ESCP Business School, head of the research department of the French Observatory of Economic Conditions at Sciences Po.

Dominated by the Ukrainian crisisthe informal summit of EU Heads of State and Government meeting this week in Versailles is expected to see difficult discussions on the implementation of a new joint debt issue which would work the same way as Recovery and Resilience Facility (RRF) of the Next Generation EU (NGEU) programme. This program was developed to deal with the medium and long-term consequences of the Covid-19 crisis.

The idea that will probably be debated in Versailles is to provide EU member states with additional means to deal with the economic consequences of the war in Ukraine – energy, anyone? – and build a “Europe of defence”.

Beyond the tensions of certain countries of Northern Europe on the systematic use of public debt to fight against all the evils which affect the European Union, it is perhaps useful to remember two things:

On the one hand, the activation of the Recovery and Resilience Facility is in progress and we will have to wait a little longer to know if it has achieved its objectives. The economic effects estimated ex ante are generally positive, especially since the funds allocated will be directed towards Member States most affected by the pandemic (Italy and Spain).

On the other hand, the Next Generation EU program is divided between transfers or subsidies (390 billion euros, in constant 2018 euros) and loans (360 billion euros, in constant 2018 euros). The benefits of each are quite different:

The transfers are a form of free money at least in the short term for those who receive them: repayment will be late and shared between all member states, so that recipients will only repay a fraction of what they receive.

The loans involve the payment of immediate interest, but at a rate lower than the national rate if the borrowing country has a positive interest rate differential compared to the best borrowing terms of the European Union.

The expected gain from the loans is therefore much lower than the expected gain from the transfers… which has the corollary that of the 360 ​​billion euros planned for these loans, a significant fraction risks never being mobilized by the Member States. Why take out a joint loan if you can go directly to the financial markets to finance yourself?

So rather than considering renewing – already – the NGEU program by adapting it to the new challenges, would it not be possible for the EU to transform the residual loans from the Recovery and Resilience Facility into transfers and subsidies? immediately to Member States?

The facility exists. It has not yet proven itself, but the Europeans agree that it should be implemented. Let’s give it every chance of being effective by using it fully and very quickly: there is no shortage of projects to be financed!

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