How should the EU deal with its rising borrowing costs?

Publishing date
29 May 2023
Grégory Claeys
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Title card of the 25/05/2023 newsletter with the picture of Grégory Claeys

The policy response to the COVID-19 crisis has brought about significant changes in the nature and scale of EU borrowing. The outstanding EU debt increased massively, from around €40 billion in mid-2020 to €400 billion as of May 2023. This rise is expected to continue until 2026. 

When large-scale EU borrowing started, interest rates were at historical lows. However, in 2022, EU borrowing costs experienced a sharp rise. On top of the widespread increase in interest rates caused by the European Central Bank (ECB) monetary tightening, the EU also faced a widening spread between its yields and those of major European issuers, which resulted from a combination of market factors, circumstantial elements and institutional features (which are discussed in detail in a forthcoming paper).  

While the EU cannot control the cyclical movement of interest rates, the European Commission should continue its efforts to narrow the spread with major issuers. Further developing relevant market infrastructure and improving its issuance strategy would help. However, technical patches will not be enough: institutional developments, including progress in establishing new own resources and a long-term significant presence in the bond market, will be crucial in fully reaping the benefits of EU borrowing. 

Interest costs associated with the significant portion of EU borrowing designated for financing grants will be serviced through the EU budget. Due to the current and expected high levels of interest rates, these costs could be twice as high as the initial estimates made at the beginning of the EU's 2021-2027 budget cycle. Consequently, as interest costs are accounted for under so-called ‘expenditure ceilings’ of the EU budget, this will exert additional pressure on the funding of crucial EU programmes, which are already affected by inflation. Therefore, the EU should promptly review how interest costs are accounted for in the EU budget.  


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About the authors

  • Grégory Claeys

    Grégory Claeys, a French and Spanish citizen, joined Bruegel as a research fellow in February 2014, before being appointed senior fellow in April 2020.

    Grégory Claeys is currently on leave for public service, serving as Director of the Economics Department of France Stratégie, the think tank and policy planning institution of the French government, since November 2023.

    Grégory’s research interests include international macroeconomics and finance, central banking and European governance. From 2006 to 2009 Grégory worked as a macroeconomist in the Economic Research Department of the French bank Crédit Agricole. Prior to joining Bruegel he also conducted research in several capacities, including as a visiting researcher in the Financial Research Department of the Central Bank of Chile in Santiago, and in the Economic Department of the French Embassy in Chicago. Grégory is also an Associate Professor at the Conservatoire National des Arts et Métiers in Paris where he is teaching macroeconomics in the Master of Finance. He previously taught undergraduate macroeconomics at Sciences Po in Paris.

    He holds a PhD in Economics from the European University Institute (Florence), an MSc in economics from Paris X University and an MSc in management from HEC (Paris).

    Grégory is fluent in English, French and Spanish.


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