EU Members Shunning Offer of Cheap Loans With Strings Attached

The European Union’s ambition to become one of the world’s largest issuers of top-rated sovereign debt may be undermined by the reluctance of the bloc’s own member states to tap a jointly-financed stimulus plan.

Around half of the 800 billion-euros ($960 billion) recovery package consists of subsidized loans, which will involve the European Commission raising debt in capital markets to finance lending to member states. The rest consists of grants, which will be collectively repaid from future EU budgets.

Out of the 14 EU member that have submitted spending plans to far, only four include requests to make use of the loans available through the so-called Recovery and Resilience Facility, commission spokeswoman Marta Wieczorek told reporters in Brussels on Tuesday.

Countries including Poland and Portugal have only asked for a fraction of the loans they were entitled to. Others, like Spain, have yet to provide details on the loans part of the package or have yet to submit their final spending plans all together. Only Italy and Greece so far have plans to make full use of the recovery loans.

While member states can opt to draw on the loans later on, submitting additional requests until August 2023, it is not yet clear whether they will opt to. Portugal has said it won’t use its full allotment, citing its already high debt levels. Others can borrow in capital markets under similar terms to the commission and so have little incentive to draw on the joint facility, which offers financing with more strings attached.

The EU’s first meaningful entry into bond markets is part of a strategy designed to boost integration in the region and encourage a stronger international role for its common currency. The hope for some in the bloc is that if these exercises can generate sufficient critical mass they will lead to the creation of regional “safe asset” bonds that could rival U.S. Treasuries -- a goal for European policy makers even before the common currency was created two decades ago.

The catch though is that funding from the EU stimulus plan is subject to strict conditionality, including implementing structural reforms dictated by the commission and spending a third of the package on climate-friendly investment. Disbursements will only be possible after meeting concrete milestones. With sovereign yields kept low thanks to central bank interventions, many member states can borrow more or less as cheaply from markets and still have a free hand on how they spend the money.

Complying with the terms of the package is already proving complicated for some governments. While the deadline for the submission of plans was end-April, 13 member states have yet to file their requests. Around three months will be needed from the time a plan is submitted until the first payments can be approved.

“Of course, if they decide to request further loans, they will need to submit an updated recovery and resilience plan, outlining additional reforms and investments in order to justify why the additional financing is needed,” Wieczorek said Tuesday.

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