Auctions of EU-bills and primary dealers to help €750 billion borrowing
The EU will soon have to start funding a €750 billion recovery programme as rates rise and bond markets sell off. Short-dated EU-bills must carry more of the borrowing burden. That requires auctions and a new system of primary dealers.
At the end of March, investors were absorbing an intervention by the German Constitutional Court that has delayed that country’s ratification of the €750 billion recovery fund under the NextGeneration EU (NGEU) budget. All 27 member states must ratify this.
The challenge comes from German academics who, it appears, object to the size and extended maturity of EU borrowing to fund economic recovery from the near-term emergency of the pandemic through long-term investments in green and digital technology. The complainants see this as de facto fiscal union.
It is a reminder, suggests Reinhard Cluse, economist at UBS, that any steps toward EU integration and burden-sharing are – and will likely remain – subject to intense legal scrutiny in Germany.
A delay of a few weeks would not disturb investors unduly. But if it were to look likely that Germany will not ratify the NGEU budget, then the turn of sentiment against highly indebted peripheral sovereigns might be sharp.
Carsten Brzeski, global head of macro at ING, and Antoine Bouvet, senior rates strategist, points out: “At this stage, it is impossible to tell how the injunction and a possible lawsuit will evolve.