BRUSSELS — The European Union is preparing to raise up to €150 billion to finance military spending as the region grapples with changing security dynamics, particularly the perceived reduction of U.S. security guarantees.

European Commission President Ursula von der Leyen announced plans on Tuesday to utilize bond auctions, which if approved by EU member states, would provide funding to national governments for defense expenditures.

Member states would subsequently repay the Commission for the funds utilized.

Ulrika Torell, senior portfolio manager at the Swedish pension fund Alecta, managing assets worth approximately €118 billion, indicated that the fund would consider investing in new EU debt, based on historical purchases.

Tony Persson, Alecta's head of fixed income, asserted strong market interest in these bonds, contingent on obtaining political consensus.

The EU's favorable credit rating enhances its borrowing appeal, with major rating agencies, except Standard & Poor’s, assigning it a AAA rating, categorizing it as effectively risk-free.

Germany remains the only major EU economy with a comparable credit rating.

The decreased availability of high-rated bonds, following downgrades among various issuers, has heightened interest in Eurobonds, according to Elizabeth Palandeng, spokesperson for APG, the investment arm of the Netherlands' largest pension fund, ABP.

Historically, the EU has engaged in joint borrowing, but the COVID-19 pandemic marked a significant inflection point, enabling the EU to raise capital when several member states faced unsustainable debt levels.

By the end of 2024, the EU Commission had raised €330 billion for recovery efforts and an additional €100 billion through the SURE initiative for protecting jobs during the pandemic.

Prior to this funding mechanism, the Commission was issuing about €500 million annually.

In recent years, the EU has tapped markets for €50 billion to support Ukraine and an additional €4 billion for investments in the Western Balkans.

The Commission's prior plan indicated intentions to borrow approximately €160 billion in 2025, positioning it as the fifth-largest issuer of tradable euro-denominated debt this year, though it still lags behind national treasuries of countries like France and Italy, which are set to issue over €300 billion.

Fiscal conservatism remains a concern, particularly among economically stronger countries like Germany and Denmark, which have traditionally favored limitations on the volume and scope of EU borrowing.

Should a significant round of joint borrowing succeed, it could stabilize the EU's position as a regular participant in the bond market.

Von der Leyen's proposal aligns with former ECB President Mario Draghi’s recommendations for financing common European challenges through pooled resources, identifying 'security and defense' as a key public good.

Alvise Lennkh-Yunus, head of sovereign and public sector debt at Scope Ratings, emphasized that new joint borrowing would send a positive signal to markets, similar to the impact of the NextGenerationEU recovery framework during the pandemic.

Currently, the EU faces challenges in achieving optimal pricing for its bonds, as its securities are not yet included in major sovereign debt indices; such inclusion would compel investment funds managing trillions in assets to allocate resources toward EU debt.

Additionally, the lack of opportunities for hedging risks through futures and options contracts sets EU bonds apart from national government bonds, like German Bunds and French OATs.

Stéphanie Riso, the Commission’s top budget official, has voiced goals to normalize joint European bonds as established financial products, relating previous perceptions of EU borrowing to debts issued by government-backed agencies.

Riso acknowledged efforts to clarify the evolving nature of EU bonds to the investment market.

Despite a competitive debt market already facing pressures from globally rising government debt, observers acknowledge that joint debt may serve some countries better than issuing nationally, although an increase in bond supply could elevate borrowing costs.

The response from the market remains resolute, with industry analysts suggesting that the ongoing flow of capital reflects the adaptability of the financial landscape despite various global crises, including financial downturns and geopolitical conflicts.