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Financial activities undertaken by the European Commission and the European Investment Bank (EIB) are an indispensable tool for EU policy implementation.

Understanding the financial backing for these activities has become more important with the recent expansion of the European Fund for Strategic Investments (EFSI), the so-called Juncker-Plan.

“We have analysed the financial interdependence between EU member states, the European Commission, and the latter’s guarantees on external and EFSI-related operations, conducted by the European Investment Bank,” says Alvise Lennkh, analyst at Scope Ratings.

“Overall, we find that available buffers exceed the total risk exposure of the EU budget by far, shielding EU member states from possible fiscal impacts from calls on EU guarantees,” Lennkh says. “However, net buffers have been declining in recent years, especially given the increasing guarantees to the EFSI.”

Specifically, the total annual risks borne by the EU budget via its guarantees for back to back loans, mainly to Ireland (A+/Stable) and Portugal (BBB/Positive) and the operations related to the EIB external lending mandate have increased to EUR 9.9bn at end-2018 from around EUR 3.8bn in 2012. The disbursed EFSI-related exposure guaranteed by the EU has increased to EUR 15.8bn since its inception in 2015.

“This marked increase in contingent liabilities for the EU budget has to be seen in the context of the substantial liquid assets at the European Commission’s disposal," says Lennkh.

These liquid assets relate to two guarantee funds, the cash buffer and the ability to delay significant amounts of EU annual expenditure. Together, these funds have hovered around EUR 75bn-90bn over the past few years, mainly reflecting the cyclical nature of disbursements from structural and cohesion funds. Still, these developments have reduced available net assets to around EUR 61bn in 2018 from a peak of EUR 80bn in 2014.

The EU’s available buffers can mitigate the impact of any shock that can result in a guarantee call. Consequently, so long as available buffers exceed the EU’s risk exposure, member states’ contingent liabilities to the EU do not increase. This could change, however, if available buffers fall short of outstanding guarantees.

“We are far from such a situation. In fact, in the current environment where governments are looking for means to boost investment, these significant buffers could provide one possible avenue to mobilise resources swiftly within the existing frameworks," Lennkh adds.

Only in the unlikely event that the European Commission’s net buffers turned negative would it be necessary to reassess the EU’s budget guarantees to Eurostat’s accounting of member state contingent liabilities, which to date has not been put in place.

This should ensure that these risks to EU member states, including those due to the credit enhancements to the EIB via EU budget guarantees, are adequately accounted for in Scope’s sovereign and supranational credit assessments.