Germany Backs Joint EU Debt for Loans to Ease Energy Crisis
Chancellor Olaf Scholz will reverse a steadfast German position and support joint issuance of European Union debt to cushion the blow of the energy crisis as long as the freshly raised money is disbursed to struggling member states as loans, not grants.
(Bloomberg) — Chancellor Olaf Scholz will reverse a steadfast German position and support joint issuance of European Union debt to cushion the blow of the energy crisis as long as the freshly raised money is disbursed to struggling member states as loans, not grants.
Scholz signaled openness to use common borrowing on the sidelines of an EU summit in Prague last week, according to people familiar with the chancellor’s stance. The change in position follows criticism from other leaders that Germany’s €200 billion ($194 billion) national aid plan could trigger economic imbalances in the bloc.
The issuance of joint debt would represent a dramatic about-face for the German government, which, along with other countries including the Netherlands, has pushed back against such measures. But calls to action have been increasing, reflecting concerns about the massive spending that will be needed for the EU to get through a winter without Russian gas and to transition to alternative energy supplies.
Italian bonds outperformed, with the nation’s 10-year yield premium over Germany — a closely-watched gauge of risk in the region — falling 12 basis points to below 2.4 percentage points. The euro trimmed an earlier decline, trading around $0.972.
The EU’s pandemic-era SURE program — which offers employment support of as much as €100 billion in the form of loans — could provide a blueprint for a new debt-backed instrument, said the people, who asked not to be identified because the deliberations are private.
The details of any new program haven’t been set, but it would likely be smaller than the debt-financed €724 billion Covid recovery fund that in 2020 was partly developed by then-Finance Minister Scholz and combined the disbursement of non-refundable grants with low-interest loans, according to the people. That emergency package — heralded as a Hamiltonian moment — was a first for the bloc, and supporters insisted that such a program would only happen once.
A German government spokesperson declined to give a clear answer when asked about Scholz’s position on joint debt, saying considerable funds are still available or are currently being mobilized at the European level, without ruling the option out.
On Friday in Prague, Scholz also avoided giving a concrete answer to questions about whether Germany would support another round of jointly issued debt to deal with the crisis. He pointed instead to still unused loans and grants from the pandemic recovery fund. “So there are still a lot of resources available,” Scholz said at the time.
Scholz is reluctant to give the green light for another debt-financed instrument which would include grants again as he has to take into account a final ruling by Germany’s highest court about the constitutionality of the EU recovery fund, one of the people said.
In a preliminary emergency ruling, the German judges said in April 2021 that there would be more potential harm from blocking the fund pending a full ruling than from allowing it to go ahead in the meantime. They also hinted that jointly issued EU debt to finance grants to member states in an emergency could be in line with the constitution as long as the measure remains a one-off.
Another reason why Scholz has been cautious on the plan has been uncertainty over Italy’s incoming government, which will likely be led by Giorgia Meloni, the right-wing leader of the Brothers of Italy party. Meloni has signaled that she will govern as a moderate, but has indicated that Rome’s Covid recovery plan needs fine tuning.
Scholz first wants to see Rome’s new coalition agreement and discuss European integration with Meloni before committing to any further debt-financed EU programs, the person said.
(Updates with market reaction in fourth paragraph)
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