In its annual report on the European Union, Moody’s Investors Service says the European Communities’ Aaa ratings and stable outlook reflect the EU’s prudent financial policies, sound loan portfolio, and the firm support of member states.
Moody’s Aaa rating applies to the EU’s three borrowing entities, the European Community (EC), European Atomic Energy Community (Euratom), and European Coal and Steel Community (ECSC).
“The ratings incorporate the EU’s conservative budget management in light of the financial pressures emerging from enlargement,” said Moody’s Vice President Alexander Kockerbeck, author of the repot. “With the EU Treaty’s requirement of a balanced budget, the EU continues to issue debt to provide financial support for member states and non-member countries.”
A new financial framework for the period 2007-2013, which took effect at the start of this year, followed a tumultuous negotiation in which heads of state and government finally reached a consensus on the EU’s financial framework. A maximum total expenditure of EUR 864.4 bln was agreed to with an annual average ceiling of 1.03% of EU GNI for commitment appropriations and 0.98% of EU GNI for payment appropriations.
The 2007-2013 financial framework also includes a new Instrument for Pre-accession Assistance (IPA). “This brings all pre-accession support into one single, focused instrument to facilitate coherence and improve consistency of the EU’s financial aid policy, to achieve better, more effective results with available resources,” said Kockerbeck.
Although Moody’s does not foresee any pressure in the short to medium term, “the evolution of the institutional architecture will need to be monitored on an ongoing basis as it impacts the efficiency of the whole project and reflects the degree of support it enjoys from member states,” said the analyst.
After a Europe-wide “period of reflection” designed to overcome the constitutional crisis that followed the rejection of the new constitution by
“However, as a result of intense pressure from Poland, which would have lost votes under the qualified majority voting procedure, the majority voting is to be implemented only as of 2014, with a transition period until 2017,” said Kockerbeck. “Implementation of the reform treaty will remove uncertainty over the EU’s ability to act, which, in itself, does not pose any threat to the EU’s credit standing.”
The European Coal and Steel Community’s treaty expired in 2002 but the ECSC’s liquidation does not affect the security of its outstanding debt, which continues to be rated Aaa. All debt maturing after 2002 not guaranteed by member states is fully covered by a fund established with the ECSC’s remaining assets.
The Commission is empowered to borrow on behalf of the EC and Euratom, and all borrowings are ultimately guaranteed by the EC. The debt service of non-member countries is covered by a specifically designated Guarantee Fund for external actions once a loan default exceeds three months.
