“The mismatch between the greatly increased limit on its own resources until 2058 and the coronavirus package raises problematic questions. Politically, this is a signal that Europe is already making way for additional possibilities of incurring debt totalling several billion euros for other purposes in view of the pandemic. This excess cover poses high liability risks for the German federal government budget,” concludes author Professor Friedrich Heinemann, who presented the study at an expert hearing to the EU Committee at the German Bundestag today.
The calculations are based on the planned financing of the 750-billion-euro coronavirus recovery plan through the issuance of EU bonds. The study by ZEW shows that, in fact, more than 820 billion euros in COVID-19-related debt will be taken on by 2026, as amounts are increased annually at a constant rate of two per cent. In order to finance the debt incurred by the pandemic, the EU plans to request additional contributions from its Member States of up to 0.6 per cent of their total economic output until 2058, in addition to existing revenues. This additional margin provides financial security for the debt clearance brought about by the pandemic. The ZEW study calculates the capacity to repay this debt resulting from the additional margin. The findings are dependent on expected economic growth. Even in the worst case scenario where the EU experiences absolutely no economic growth until 2058, more than four trillion euros of debt could still be paid off thanks to this additional margin. In fact, the EU only requires 430 billion euros for the coronavirus recovery plan, since remaining funds are issued as loans which are to be paid off by Member States seeking financial assistance themselves.
Even if other very unfavourable assumptions were to come to fruition, such as other Member States exiting the EU after Brexit or the loans not being repaid by some Member States as agreed, a substantial imbalance still remains in place. Contributions made by Germany alone would suffice until 2058 to clear debt incurred by COVID-19 altogether.
“New EU bonds are very similar in their risk profile to the Eurobonds which were rejected by Germany for a long time. Germany and the other solvent Member States may be held fully liable to Member States that are unable or unwilling to repay their debts fuelled by COVID-19. In fact, due to the EU budget’s highly permitted access to contributions made by its Member States, there is no upper limit of liability assumed by Germany. Hence, the coronavirus funds are much more risky for Germany than the European Stability Mechanism which strictly limits Germany’s liability to a certain amount,” Friedrich Heinemann explains.
The study additionally points out a further consequence of the debt balance. Since additional ways of clearing debt remain in place until 2058, there is a strong incentive to put off debt repayment and instead use this capital for current expenditure for decades to come.
“The Bundestag should press for an amendment to the own resources decision. The minimum would be to oblige the government to a contract note requiring a minimum repayment per year of coronavirus-related debt from the outset. If the parliament does not make the necessary adjustments now, its coronavirus plan is likely to lead to permanent debt financing of the EU budget,” Heinemann says.