There is no doubt that the European Union has just run into one of the most important moments in its history. The need to achieve defensive independence and not to require its American partner in this work has been evident, at a time when the Trump administration has made it clear that Europe must defend itself, because the US will not always be there to do it to do it . Now, old Europe has a problem to solve: how will the enormous expense necessary to achieve the objective of a common defense be paid? The great Eurozone leaders are debating it in Paris this week, and although the broadcast of Eurobons seems the option they value as more likely, there are other possible mechanisms that can contribute. And there is an especially striking one that has already been put on the table: use the European stability mechanism (Mede), the fund that was created in 2011, which saved the euro at that time of debt crisis, and that, in theory, theory It can inject up to 700,000 million euros.
Increasing military spending to achieve the demands of the United States will not be cheap. The Trump Administration (and also Mario Draghi) asks to reach 5% of GDP in defense spending, 3 points more than the agreement that had so far, and From S&P global they calculate an increase in the joint annual expenditure of between 230,000 million and 800,000 million euros; The analysts of Bloomberg Economics, On the other hand, they calculate a necessary expense of about 3.1 billion euros in the next 10 years, that is, about 310,000 million every year for a decade. Be that as it may, governments will need a solution to get enough money to defend Ukraine, and also their own borders, in the coming years.
The proposal that seems to be better positioned to become a reality is to use new Eurobones emissions, that is, repeat the formula that was used in the past at times of greatest emergency. The issuance of Eurobons involves borrowing the European economy more, which is already very indebted at this time, something that has been evident in recent months with the economic and political crisis that France is suffering.
In the pandemic, the NextGeneu Fund was created, an organism with which the greatest amount of stimuli in the history of the euro zone have been injected, and it was done through the issuance of the first Eurobons in history. It was a key step ahead for the future of the Union; Jim McCormick, an advisor to the Global Investment Table in Citi’s interest rates, explained in an interview with electionomista.es How, in his opinion, he was the trigger who has eliminated the possibility that there is a break of the European Union in the future: “The risk of breaking the euro zone was reduced to a virtual 0 at the time when the union He crossed the Rubicón and voted the recovery plan. ” Now This joint bond emission formula is again on the table, at a time of great tension for the block.
The French Minister of European Affairs, Bejamin Haddad, has acknowledged that in the next few days “joint debt issuance” will be raised, at a “existential” moment for the Eurozone. “You have to think about how we are going to finance a step forward in our security,” Haddad said. The minister himself has indicated that there is another option, and is to use the rescue fund, the European stability mechanism (MEDE).
The option of a new round of joint debt emissions in the euro zone has been felt on Monday in the fixed income markets, with generalized sales of European bonds by investors, which have increased almost 6 basic points profitability to Expiration of the German bond, up to 2.48%.
The Mede, an agency to save the euro … and the eurozone
If the Mede was designed in 2011 as a permanent European rescue fund, to “help eurozone countries that are suffering from severe financial stress,” now everything indicates that the agency can be redirected to “rescue” to the European army as one of the main financing tools.
The rescue fund was, in the debt crisis suffered by the euro zone in 2011 and 2012, the As in the sleeve That Mario Draghi had to support his famous phrase: “We will do everything necessary to save the euro, and believe me, it will be enough.” If then the Mede was a great help to stabilize the spirits of the markets, now it resurfaces as a crutch with which to complement the debt emissions that the euro zone will have to pay to pay the account of a larger and better prepared army For the future.
The reality is that, by itself, the MDE has not enough capacity to undertake all the necessary increase in defense spending. Today, according to the European Commission, it has a budget that allows you to provide up to 700,000 million euros, something that could change if Brussels considers it necessary. The Mede is financed by itself, and goes to financial markets for capitalthrough debt sales, since it only has 80,000 million euros of its own capital, which is used as a guarantee for the debt issued in the market.
The debt issued by Mede has a “strong credit rating”, according to the agency itself, which has a rating of AAA For the Scope qualification agency, who consider that “it is supported by a solid capital base, very high liquidity mattresses, excellent access to the capital market and key shareholder that have a high rating”, as they are, in this case , Germany, Italy, France and Spain, four shareholders that “represent 76% of the subscribed capital,” says Scope.
Does the ECB have a role in all this?
From S&P global they consider that the increase in military spending will “press the solvency” of sovereign issuers, and this can have an impact on financial markets, which could stress the profitability of European bonds. However, it cannot be ruled out that the European Central Bank (ECB) has a role in all this: as already seen during the Covid pandemic, so as not to load the market with the entire new debt offer, the ECB came to buy A large part of the bonds issued.
Now, the ECB has been doing hollow for almost 3 years to have a maneuver margin, in the event that in the future its presence will be needed again, and it is required to buy new European debt emissions. Since June 2022, the ECB balance has been reduced by 2.5 billion euros, from 8.8 billion to the current 6.3 billion billion, a decrease of almost 28%. Assuming that it is needed in the future that the ECB becomes an emergency buyer of European bonds, at least, using historical figures as a reference, it seems that it would have a place to absorb these 2.5 billion eurosan quantity negligible (the estimation of Bloomberg Economics of the total necessary expenditure in defense is 3.1 billion).
Of course, in that case, it cannot be ruled out that inflationary pressures make appearance again, and more taking into account that, as explained by S&P global, the fiscal multiplier of the EU defense spending “remains modest”, since Most of that expense is dedicated to buying weapons from foreign countries, such as the United States, and does not end up promoting the economic growth of the euro zone.
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