Macron greets Belgian PM Alexander De Croo in Versailles
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This week it was reported the EU is considering a massive joint issue of bonds in order to finance energy and defence spending in the wake of the Ukraine crisis. The bloc has attracted some tough questions over its dependence on Russia for energy with over 40 percent of European natural gas flowing from the country. The issue has been dominating a two day summit of EU leaders in Versailles discussing the response to the Ukraine conflict and dealing with the economic fallout. In a research note analysts at Saxo Bank commented: “If the EU is able to roll out a mutualized debt package to fund the new emergency priorities in the wake of Russia’s invasion of Ukraine, it looks euro-positive as it keeps euros invested locally rather than recycled abroad and would show once again that in an emergency, the path lies towards increasing fiscal integration.”
However the plans have so far been met with differing reactions.
Germany and the Netherlands have opposed the idea, arguing there is still unused money in the EU’s pandemic recovery fund.
Speaking ahead of the summit Dutch Prime Minister Mark Rutte said: “I am not at this stage agreeing with a NextGenerationEU mark 2”, a reference to the EU’s debt financed pandemic recovery fund.
The Netherlands, along with Austria, Denmark and Sweden, were previously characterised as ‘the frugal four’ over their opposition to the pandemic recovery fund in 2020.
EU leaders are meeting for the second day of a summit in Versailles (Image: Getty)
The bloc is looking to reduce its dependence on Russian energy (Image: Getty)
Germany has also established a track record of advocating for fiscal tightness.
Melanie Debono, Senior Europe Economist at Pantheon Macroeconomics, said: “Some frugal states are pushing back on the idea of joint debt for the transition away from reliance on Russian energy.
“Covid hit all member states equally, so there was broad-based support for issuing new debt to help with the recovery, this does not.
“And what is also different now is that the countries most exposed to Russian energy, namely Germany, could issue national debt at cheaper rates than the EU would. “
France, which is supportive of the plans, has expressed some caution with President Macron arguing he’d rather focus on goals first rather than the tools to reach them.
He told reporters: “That’s always been my way of doing things.
“It helps lift taboos and blockages.”
President Macron said he preferred to focus on the goals rather than the tools (Image: Getty)
Meanwhile the EU itself has tried to downplay the reports, with commission Vice President Frans Timmermans denying any formal plans from the European Commission.
Markets however appear to have taken the prospect to heart with the euro and bond yields rising.
In a research note, analysts at ING Think, commented: “The way rates markets reacted to the news is telling.
“Firstly, it shows that the widespread assumption is that the EU Covid-19 fiscal response is the template for future fiscal decisions.
“This is understandable given the similarities between both crises: an external and asymmetric shock faced by member states.
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Netherlands Prime Minister Mark Rutte has opposed the idea of a second round of debt issuance (Image: Getty)
“One has to expect some resistance from some corners of the EU however, as the funds from (the Covid recovery fund), a supposed ‘one-off’, are not even spent yet.
While the EU’s long term trajectory seems to be away from Russian energy dependency the prospect of more immediate sanctions is still receiving resistance.
Following the first day of the summit on Thursday Hungarian Prime Minister Viktor Orban insisted in a video message: “There will be no sanctions that extend to the area of oil and gas”.
Germany has also so far been resistant to such an idea after the US slapped a ban on Russian oil.
EU leaders are meeting again on Friday with economic impacts set to remain a key discussion point, though no final decision on a debt issuance is expected.