Bond market fears thwart EU’s energy crisis spending plan

Rising government borrowing costs across Europe are undermining the European Commission's plan to give member states fiscal room to invest in energy independence, with only Italy and Greece applying for the looser budget rules more than three months after Brussels proposed them.

The Commission proposed in June allowing countries to spend up to 0.3% of GDP annually through 2028 on reducing fossil fuel dependence without breaching EU fiscal limits — an extension of the national escape clause originally created for defense spending. But fears of bond market punishment have kept most capitals from taking up the offer, even as the Iran war drives energy prices higher and Brent crude trades above $108 per barrel.euractiv+2

Bond Markets Dictate the Terms

EU officials expect at most a handful of additional countries, mostly from southern Europe, to seek the flexibility in coming weeks. The reluctance stands in sharp contrast to last year, when 18 of the bloc's 27 member states activated the escape clause to boost defense spending by up to 1.5% of GDP.euractiv

"EU capitals are very worried about being punished by the market, especially if not all countries choose to activate the clause at the same time," Mujtaba Rahman, managing director for Europe at the Eurasia Group, told Euractiv. Sander Tordoir, chief economist at the Centre for European Reform, added that "the bond market rather than the EU fiscal rules are the first concern" for most governments.euractiv

France's 10-year bond yield has climbed to around 4.5%, its highest level since the 2008 financial crisis. UK 10-year gilt yields stood at 5.35% as of September 11, while UK 30-year gilts have surged to roughly 5.95%, levels not seen since 1998.cryptobriefing+3

Greece Outshines France in a Historic Reversal

In one of the most striking illustrations of shifting risk perceptions, Greece now borrows more cheaply than France across multiple maturities. Greek 10-year bonds yield around 3.1%, well below France's 4.5%. Analysts attribute the gap to Greece's fiscal discipline, with its debt-to-GDP ratio on a steep downward path, while France struggles with political fragmentation and persistent deficits.streamlinefeed+3

Greece has already raised 95% of its borrowing needs for the year, insulating it from current market turmoil, according to Ekathimerini. France, by contrast, must continually roll over its massive debt in volatile markets.ekathimerini

Northern Europe Welcomes Restraint

Some EU capitals — particularly in the bloc's fiscally conservative north — have quietly welcomed the reluctance to invoke the escape clause. "We fear too much flexibility will negatively impact the sustainability of government debt in other EU countries," one EU diplomat told Euractiv. "We should be happy that not too many countries jumped on this train".euractiv

The Commission maintained that the decision rests with each member state, noting that some governments may fund energy measures within their existing budgets. But with borrowing costs at multi-year highs and the Iran war showing no signs of ending, the gap between Brussels' ambitions and national fiscal realities continues to widen.euractiv