Borrowing money has become a major financial challenge for the European Union. After years of exceptionally low interest rates, the cost of issuing common European debt increased sharply, creating additional pressure on the EU budget.

An economic study published in May 2023 examined why European bonds had become more expensive and what measures could help reduce their costs.

The findings remain relevant to discussions about financing economic recovery, infrastructure and other major European programmes.

Why European Borrowing Expanded

The European Commission traditionally borrowed relatively modest amounts to support countries experiencing financial difficulties. However, the pandemic transformed its role in international bond markets. New programmes, including NextGenerationEU and SURE, required substantial borrowing to finance economic recovery and employment support.

By May 2023, outstanding EU debt had reached approximately €400 billion, with 85% issued since 2020. Further borrowing was planned through 2026 to finance recovery programmes and external assistance. This expansion made the European Union a significantly more important participant in international debt markets.

Interest Rates Changed Everything

When the borrowing programmes were introduced, interest rates were historically low. Some European bonds even offered negative yields, allowing the EU to obtain financing under exceptionally favourable conditions. The situation changed in 2022 as inflation accelerated and the European Central Bank increased interest rates.

Investors began demanding higher returns, raising borrowing costs across Europe. However, EU bonds experienced an additional disadvantage: their yields increased relative to those of major national issuers, including Germany and France.

This difference made common European borrowing more expensive than originally anticipated.

Why EU Bonds Cost More

Researchers identified several structural explanations for the borrowing premium. Unlike established national governments, the European Union has a relatively short history of issuing debt on such a large scale. Its bond market also lacks some of the trading infrastructure and liquidity associated with major sovereign securities.

Investors may therefore require additional compensation when purchasing EU bonds. The uncertainty surrounding future common borrowing also matters. A predictable, long-term presence in financial markets could help establish greater investor confidence.

Budget Pressures Could Intensify

The study estimated that approximately €421 billion of EU borrowing by the end of 2026 was intended to finance grants and other non-repayable support. Unlike loans, these funds do not generate direct repayments from recipient countries.

Consequently, their interest costs must be covered through the EU budget. Researchers warned that these expenses could be twice as high as initially estimated for the 2021–2027 budget period. Because debt-servicing costs compete with other expenditure, higher interest payments could reduce resources available for European programmes.

How Borrowing Could Become Cheaper

The economists recommended improving the European Commission's bond issuance strategy and strengthening market infrastructure.

More efficient trading arrangements could make EU securities easier to buy and sell, potentially reducing the returns investors demand. They also highlighted the importance of establishing reliable revenue sources and providing greater clarity about the future of common borrowing.

However, these measures would not eliminate the wider influence of interest rates.

What Europe Can Learn

The analysis demonstrates that borrowing conditions depend on more than the amount of debt issued.

Market confidence, institutional arrangements and the organisation of bond markets can significantly influence financing costs.

Although the study's estimates reflect conditions in 2023 rather than confirmed outcomes in 2026, its recommendations highlight enduring challenges.

For the European Union, maintaining affordable borrowing will require careful financial planning, credible repayment arrangements and continued efforts to make common European debt attractive to investors.