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EU To Reveal Plan For "Potentially Massive" Joint Bond Sales To Fund Energy And Defense

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by Tyler Durden
Tuesday, Mar 08, 2022 - 12:44 PM

In an arrangement similar to the bloc's $2 trillion COVID rescue fund, the European Union has decided to jointly issue what Bloomberg dubbed "potentially massive" bond sales to finance an energy and defense fund to help the bloc maintain its resolve as its financial sanctions against Russia bite.

Paolo Gentiloni

According to Bloomberg, the proposal will be taken up during the EU leaders' summit in Versailles, France, that's set to begin on Thursday. However, the bloc's leaders are still working out the details on how the debt sales would work and how much money they intend to raise. The money will be used to help strengthen the bloc's energy and military infrastructure. 

"We have to find new tools to address new issues this crisis raises in front of us," the EU’s commissioner for the economy, Paolo Gentiloni, said Monday evening to lawmakers in Strasbourg, France. He added that he thought EU leaders would give political guidance on further moves at the summit.

A spokesman for the EU Commission declined to comment on specifics, but other sources told BBG that the plan right now is to model the new fund after the pandemic relief effort.

One option is to structure it like the bloc’s SURE program, some of the officials said, referring to a scheme that was used to finance employment support initiatives in the aftermath of the pandemic, under which member states repaid soft loans provided by the commission.

The invasion has forced the bloc to rethink its energy strategy, as the various green agendas of European states have left them dependent on imports of gas and oil from Russia. Presently, more than 40% of EU gas imports and one quarter of its oil come from Russia. On Monday, Moscow threatened to cut gas supplies via the Nord Stream 1 pipeline. But as the EU transitions away from Russian gas, the real question is: what are the alternatives?

While the bloc could use the money to pay for LNG imports from the US, those purchases will be far more expensive, while refilling storage to an average level will also be challenging due to soaring prices. The price tag could reach €70 billion ($76 billion) compared with €10 billion in previous years, according to a report by Belgian-based think tank Bruegel.

But energy isn't the only issue. The EU is also thinking about how it will spend more on defense. It all started with Germany, which recently pledged to revamp the Bundeswehr, its military, by - among other things - bringing back the draft.

"Tens of billions of euros will be needed to strengthen European defense, to not rely on the U.S. and to be self-sufficient in energies, to be independent of Russia," Slovakia’s finance minister, Igor Matovic, said on Tuesday. "Joint EU bonds are the way to go -- Slovakia will surely need a helping hand from richer European countries, we can’t do it ourselves."

Research from Jefferies shows that should non-US NATO Members seek to reach the 2% threshold for military spending, they would need to increase their defense budgets by 25%.

European currencies rallied on the news, led by the Norwegian krone, while the euro looked to be on track for its first daily gain in seven days.

That said, it is unclear if Europe's remission into money printing means that any hopes of ending QE - because in a time of soaring yields, the price indiscriminate ECB could soon be the only buyer - are now effectively over.

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