Working paper

European Union debt financing: leeway and barriers from a legal perspective

The paper investigates the legal feasibility of the EU borrowing on the capital market to finance European public goods.

Publishing date
12 September 2023
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We explore legal leeway for two approaches to debt-financing European Union spending: creation of extra-budgetary, one-off and temporary EU funds to finance European public goods (similarly to NextGenerationEU), and debt-financing the EU’s regular budget, hence creating an on-budget, permanent borrowing capacity at EU level.

We find that NGEU could in principle be replicated. This would require an amendment to the Own Resources Decision (ORD) – a unanimous Council decision that designates the main sources of EU financing and requires ratification by each member state – to authorise borrowing and specify how the borrowing proceeds are to be used. However, this approach would be constrained by the legal requirement that financing EU spending through ‘other revenues’ (as opposed to ‘own resources’ designated as such in the ORD) remain exceptional. As a result, no permanent EU tasks could be financed through NGEU-like funds and NGEU-like financing could not exceed financing through ‘own resources’.    

We also find that, while EU primary law does not stop the EU from debt-financing its budget, the scope for EU borrowing would remain severely limited compared to a sovereign state. The permissible amount of borrowing must be specified in the ORD and the EU must be able to meet its debt service in any year, which must be secured by a sufficient amount of (non-borrowed) own resources. 

Finally, considerable flexibility exists for the spending of borrowed funds, regardless of whether this occurs through new NGEU-like extrabudgetary funds or on budget. Borrowed funds could be allocated to climate funding, cohesion policy, infrastructure or research. In the event that borrowing proceeds are established as an ‘own resource’ in an appropriately amended ORD, borrowed funds could even be used for general financing of the EU budget.

The authors thank Grégory Claeys, Lucio Pench, Nicolas Veron and Jeromin Zettelmeyer for their valuable comments and suggestions.

About the authors

  • Sebastian Grund

    Sebastian Grund is a legal counsel at the International Monetary Fund (IMF). He has published a book and several academic articles on sovereign debt restructuring as well as on EU monetary and financial law. Prior to his role with the IMF, he worked as a lawyer at the European Central Bank (2015-2019) and gained professional experience in the private sector. He holds a Master of Law from Harvard Law School and a Doctor of Law from the University of Vienna and is admitted as an attorney to the New York Bar. 

  • Armin Steinbach

    Armin Steinbach is a non-resident fellow at Bruegel as well as Jean Monnet Professor of Law and Economics at HEC Paris and Research Affiliate at the Max Planck Institute for Research on Collective Goods in Bonn.

    Previously, Armin held academic posts at Oxford University, European University Institute Florence, University of St. Gallen and Harvard University. He served as civil servant in the German Ministries of Finance and of the Economy as well as in the German parliament. He practiced as lawyer with Cleary Gottlieb Steen & Hamilton in Brussels and at the World Trade Organization (WTO) in Geneva. The WTO lists him as panelist serving the WTO Dispute Settlement Body.

    Armin has been a contributor and commentator to Financial Times, BBC, Bloomberg, CNBC, Le Monde, Les Echos, Frankfurter Allgemeine Zeitung, Die Zeit, and Handelsblatt.

    Armin obtained his Habilitation from University of Bonn. He holds a Doctor of Laws from University of Munich, Doctor of Economics from University of Erfurt, and Master in Economics from Humboldt University Berlin.