13th February 2025

The EU’s shadow borrowing has continued to increase, as is shown by a high-level update on the 2021 figures which were the basis of my book ‘The shadow liabilities of EU Member States, and the threat they pose to global financial stability’, which was published by The Bruges Group in 2023.

You can download the full update here.

The increase is attributable firstly to the European Union itself drawing down on its Covid recovery fund – Next Generation EU – which in 2021 had been committed but not drawn.

Secondly the stacking-up of new debt continues under the off-balance-sheet schemes enabled by the European Union issuing a guarantee to the European Investment Bank Group, and then the latter lending and issuing guarantees to projects that take on large volumes of third-party debt.

A further €865 billion should be added on to the pre-existing €1.25 trillion of financing under the InvestEU scheme and several others, €135 billion should be added under the new European Fund for Sustainable Development. That will make another €1 trillion on top of the pre-existing €1.25 trillion: €2.25 trillion or 15% of the EU’s Gross Domestic Product (GDP) now.

There has been decline in the volume of contingent liabilities but even that small piece of good news is nuanced. €600 billion of the fall of €1.06 trillion is attributable to the European Union drawing down Next Generation EU. The remainder is due to the European Central Bank reducing the scale of its interventions, allowing programmes to run off when they mature. However, an €826 billion risk stated in the book has materialised: the paper loss which would arise if interest rates rose 2%.

This amount was the fall in market value of the bonds held in the European Central Bank’s programmes. The paper loss now exists, and would be realised if any of the bonds were sold before maturity, which they now cannot be. If they were to be, the European Central Bank would be bankrupted – its capital is only €9 billion.

If the European Central Bank went bankrupt, it should be recapitalised by its owners, the EU’s national central banks. These central banks are thinly capitalized too, so they would have to obtain the funds from their owners, the member states. The member states are mainly running fiscal deficits so they would have to borrow the money. The money so borrowed would cease to be a shadow debt, it would form part of the member state’s General Government Gross Debt, it would be fully visible, and the EU’s entire financial template would be upended.

That is the main reason why the bonds cannot be sold off prior to maturity.

The total of the EU’s shadow debts and contingent liabilities has optically fallen, but the debt component has risen. The EU claims that member states’ visible debt – General Government Gross Debt – has fallen as a percentage of GDP, even though it has risen by 13.6% in absolute terms and member states have been running fiscal deficits on average in excess of the Maastricht Treaty maximum of 3% of GDP per annum.

This is incoherent nonsense. EU General Government Gross Debt at €14.5 trillion is 95.1% of EU GDP of €15.2 trillion, not 81.6%, and the shadow debt has expanded as well.

EU GDP has expanded by a mere €700 billion during 2022-4, almost exactly the same amount as has been borrowed-and-spent through InvestEU and Next-Generation EU. These expenditures appear not to be having the desired effect of underpinning a recovery and reflation of the EU economy. All they are doing is causing statistical GDP growth, and masking stagnation and possibly a reduction in the underlying performance of the EU economy.

If the amounts borrowed-and-spent under these schemes during 2022-4 are deducted back from the EU’s GDP, there was no GDP growth at all.

As it is, the whole pointless charade goes on: money is borrowed and spent, GDP optically increases, and the Debt-to-GDP ratio is presented as improving when seven member states are subject to the Excessive Deficit Procedure and the average annual fiscal deficit breaches the Maastricht Treaty.

General Government Gross Debt expands, but continues to have major categories of debt excluded from it. The economy remains sluggish. The schemes that the new debt finances are state-directed ones, fulfilling public policy objectives and not primarily aimed at making money.

This causes the third portion of the economy – ‘state directed’ activity – to expand, not the detriment of the ‘public’ sector which appears to be sancosanct and expands every year, but at the expense of the ‘private’ sector.

The private sector is converted from the economy’s growth engine, into a former of necessary but unwanted trailer.