(1) Budget available to Horizon Europe, InvestEU Fund, ReactEU, the Union Civil Protection Mechanism (RescEU), the European Agricultural Fund for Rural Development (EAFRD), and the Just Transition Fund. Actual disbursements to final beneficiaries may be lower, due to timing differences. (2) The Recovery and Resilience Plans of 25 Member States had been approved by 30 June 2022.

NextGenerationEU aims to mobilise up to 5% of EU GDP through borrowing to finance a collective and powerful EU response to the COVID-19 pandemic. NextGenerationEU is a temporary instrument, under which the Commission can raise up to EUR 800 billion between mid-2021 and 2026 through the issuance of bonds, making the EU one of the largest issuers of euro-denominated debt for the coming years. Up to EUR 250 billion will be raised through the issuance of green bonds. The proceeds of the bond issuance will allow the EU to overcome the immediate recovery challenges but also to accelerate the green transition and the digitalisation of the EU economy. To date, around EUR 100 billion in funds have already been disbursed to Member States under the Recovery and Resilience Facility (RRF) and the implementation of the Recovery and Resilience Plans is generating tangible results on the ground, both for investments and reforms.

This report – the second semi-annual report pursuant to Article 12 of Commission Implementing Decision C(2021)2502 – reviews the implementation of the NextGenerationEU funding strategy during the period 1 January 2022 – 30 June 2022. The report focusses solely on the process implemented to raise and disburse the funding for NextGenerationEU. It does not evaluate how the proceeds have been used, including for green expenditure, as that will be covered in separate reporting exercises in accordance with the Regulations of each NextGenerationEU funded instrument. This report forms one part of a regular flow of information to the European Parliament and Council providing transparency and accountability on the implementation of this large-scale, innovative funding programme in accordance with Article 5 (3) of Council Decision 2020/2053.

2.Implementation of the NextGenerationEU funding programme in the first semester of 2022

In December 2021 the Commission announced its funding plan for the period January - June 2022 which indicated an intended issuance of EUR 50 billion of long-term bonds, to be topped-up by short-term EU-Bills. In line with this funding plan, the Commission has since the start of the year raised an additional EUR 50 billion of long term funding for NextGenerationEU, through a mix of syndicated transactions (70%) and auctions (30%). These transactions have brought the total outstanding amount of NextGenerationEU bonds to EUR 121 billion, of which EUR 28 billion have been raised through the issuance of green bonds. In this period, the Commission has also issued 3-month and 6-month EU bills to meet short-term funding needs, with EUR 22.9 billion in EU-Bills outstanding at the end of June 2022.

NextGenerationEU issuances in the first six months of 2022 took place in increasingly challenging market conditions. The EU and other major economies witnessed a sharp increase in inflation and increased market volatility exacerbated by the economic shocks from the Russian invasion of Ukraine. This has led to interest rates demanded by investors increasing at a historically rapid pace as markets anticipated less accommodative monetary policy.

Despite the challenging market conditions, NextGenerationEU transactions continued to enjoy strong market support, with transactions in the first semester of 2022 being between 6 and 16 times oversubscribed. The EU is benefiting from a well-balanced and diversified investor base with good representation of different types of investors, with different buying strategies, and from all across the world. This continued high-level demand demonstrates that the Commission has established itself as a trusted highly-rated issuer in euro debt capital markets.

Through this standing in the market, the EU has been able to continue the smooth funding of Member States’ recovery plans through timely disbursement of proceeds. As a result of these funding operations the Commission was able to make all disbursements to Member States under the Recovery and Resilience Facility and to the EU budget as soon as they fell due. Between the start of NextGenerationEU in the summer of 2021 and 30 June 2022, the Commission has disbursed EUR 100.4 billion to Member States under the Recovery and Resilience Facility: EUR 67.0 billion in the form of grants and EUR 33.4 billion in the form of loans. In addition, more than EUR 15.5 billion have been transferred to the EU budget to contribute to NextGenerationEU-funded programmes such as Horizon Europe, InvestEU Fund, ReactEU, the Union Civil Protection Mechanism (RescEU), the European Agricultural Fund for Rural Development (EAFRD), and the Just Transition Fund.

The success in mobilising this large volume of funds benefitted greatly from the flexibility of the meanwhile well-established diversified funding strategy. This allows the Commission to use a range of funding techniques (syndicates and auctions) and funding instruments (bonds and bills) in order to access the markets by tailoring its approach to prevailing conditions. The increased possibility to tap outstanding bonds, through syndicated transactions and auctions, has helped to inject liquidity, supporting the secondary market for NextGenerationEU bonds and making it easier for investors to buy and sell them. NextGenerationEU bonds now exhibit liquidity comparable to that observed in the markets for European government bonds, relative to the amounts outstanding.

3.Cost of funding

Despite the more challenging market conditions, the Commission has continued to be able to raise funds on relatively attractive terms. In line with the methodology set out in Commission Implementing Decision (EU) 2021/1095, cost of funding for the period January 2022 to end of June 2022 is estimated to be around 1.24%. This represents an increase of more than 1 percentage point compared to the 0.14% cost of funding reported for the period June to December 2021. This sharp increase reflects the more difficult market conditions that are affecting sovereign, corporate and financial issuers.

The pace of increase has been one of the steepest witnessed in financial markets in the past decades. Interest rates on 10-year EU bonds have increased from 0.09% at the time of the inaugural 10-year NextGenerationEU bond in June 2021 to 1.02% for the March 2022 transaction, and to 1.53% in the most recent issuance in May 2022. 10-year EU bonds traded around 2.3% at the end of June 2022. Comparable increases have been observed for core euro-sovereign issuers. For example, interest rates on 10-year German government bonds increased from around -0.20% in June 2021 to close to 1.0% in May 2022, and were over 1.6% at the end of June 2022.

By remaining a regular, predictable issuer through this period, the EU has been able to issue its bonds with a stable price concession at issuance. This coupled with the continued strong demand from investors is a sign of trust from the markets, and provides confidence that the EU can continue to place its bonds successfully.

The Commission has also continued to manage its short-term cash holdings to ensure that they do not exceed amounts needed for the smooth execution of disbursements. Over the first semester of 2022, liquidity holdings were stable, averaging EUR 19.7 billion. This amount of liquidity was lower than in previous quarters, when larger amounts were necessary to be able to make fast and sizeable disbursements during the period of pre-financing (13% of) Member States’ recovery plans. These lower amounts of liquidity holdings, along with regular issuance of EU bills at negative rates have generated a surplus (i.e. positive carry) of EUR 56.1 million on the NextGenerationEU cash holdings from January to end-June 2022. This surplus, to be shared proportionately between the EU budget and Member States receiving NextGenerationEU loans, will partly offset the higher costs of funding.

The first half of 2022 also marked the beginning of NextGenerationEU-related invoicing of interest payments, liquidity management costs, and administrative costs to the EU budget and borrowing Member States.

4.Green bonds

In 2022, the Commission continued the implementation of the NextGenerationEU green bond programme, building on the successful inaugural NextGenerationEU green bond issuance in October 2021.

The Commission executed four additional green bond transactions in the first semester of 2022. In April 2022 and June 2022, a second and third green bond line were launched, raising respectively EUR 6 billion in the 20-year maturity and EUR 5 billion in 25-year maturity. The first transaction was more than 13 times oversubscribed and constituted the largest green bond issued in 2022 to date. In addition, the inaugural 15-year maturity green bond was tapped twice in January and April 2022, bringing its size to EUR 17 billion.