War in Ukraine: Europe could launch a new common debt to finance the energy and military response

This is a new mutation that is taking shape for the European Union. After the success of the financing of the SURE program (intended to support State social measures in the face of Covid) and the NextGeneration EU recovery plan, new common debt issues could soon see the light of day. Even if the European Commission – through the voice of Vice President Frans Timmermans – explains for the moment that it has no formal plan, the subject should be on the menu of the informal European summit in Versailles, next Thursday and Friday.

Objective: to help European countries cope with the consequences of Russia’s invasion of Ukraine. The Commission would raise significant amounts on the bond market, before redistributing them to the Member States.

“We must find new tools to deal with the new problems that this crisis raises,” European Commissioner for the Economy Paolo Gentiloni told MEPs in Strasbourg on Monday evening.


The first is to reduce European dependence on gas (40% of resources) and oil (25%) from Russia. On Monday, the President of the Commission mentioned the search for new suppliers, but above all the need to develop new clean energy infrastructures (solar, wind, hydrogen). This requires massive investments.

States, which had generally reduced their defense spending after the fall of the Berlin Wall, will also have to re-equip and modernize at a forced march. Very late, Germany will devote 100 billion euros to it. On the whole of the Old Continent, the budgets devoted to the army should increase on average by 25%.

Modalities to be defined

“In total, European states will probably have to increase their spending by three points of GDP over the next ten years,” said Erik Nielsen at UniCredit. EU assistance will therefore be welcome. It remains to be seen what the amount will be and what form it will take. These could be low-interest loans (as in SURE) or a mixture of loans and non-repayable grants (as in the recovery plan).

Initially, it would also be possible to allocate the 250 billion euros (out of 390 billion) of loans offered by the NextGeneration EU program and not yet claimed by the States. Its framework could be modified to include the new financing objectives. Another possibility would be to create an ad hoc funding program. The name, with double meaning, of Repower EU begins to circulate.

Decreasing spread

Already, the markets have reacted to the prospect of new European debt. The German 10-year rate returned to positive territory after rising 9 basis points (bp), while its Italian equivalent, which has been very upset in recent weeks, fell by 2 bp. The Germany-Italy “spread” (the difference in yield), which had reached 176 bp last week, fell back to 151 bp. A sign that investors are already less afraid of the consequences of an energy crisis for Rome.

More broadly, these new issues would anchor Brussels as one of the main issuers of bonds in the euro zone. They could even pave the way for a permanent pooled funding program. A real revolution in European construction.

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