Morningstar DBRS Confirms the European Union at AAA, Stable Trend

DBRS Ratings GmbH (Morningstar DBRS) confirmed the European Union's (EU) Long-Term Issuer Rating at AAA and Short-Term Issuer Rating at R-1 (high). The trend on all ratings is Stable.

DEVIATION FROM MORNINGSTAR DBRS' EU CALENDAR
This rating action presents a deviation from Morningstar DBRS' EU Sovereign, Sub-Sovereign, and Supranational Calendar. While the next scheduled publication date for the EU's credit ratings is 25th April 2025, Morningstar DBRS has deviated from the Calendar because of the Trend change on the credit rating of the Republic of France. The credit rating on the Republic of France drives the weighted median credit rating for the core group of the EU. On 21 March 2025, the credit rating Trend on the Republic of France's Long-Term Foreign Currency and Long-Term Local Currency Ratings was changed to Negative from Stable.

KEY CREDIT RATING CONSIDERATIONS
The rating action reflects Morningstar DBRS' assessment of the impact of the Trend change to Negative on the Republic of France's credit rating. France is one member state within the core group of the EU. The EU's credit ratings are based on the EU's Support Assessment. The deterioration in creditworthiness of the EU's member states affects the EU's Support Assessment. The weighted median credit rating for the core group stands at AA (high) in line with France's credit rating, and thus the Negative trend on France's credit rating could be relevant for the EU's rating. However, a potential modest weakening of the weighted median rating of the core shareholders is not the only factor we consider as long as cohesion among core shareholders or their political commitment to the EU does not weaken materially. Morningstar DBRS believes that the strong credibility of the commitment of member states towards the institution combined with the additional diversification benefits stemming from AAA governments outside the core group mitigates the potential worsening in the credit rating of France that could follow a negative trend. This is especially the case given the EU`s current moderate debt level.

The EU's AAA credit rating is primarily underpinned by its Support Assessment given its structure and primary funding sources. The Support Assessment reflects the creditworthiness of its core member states - Germany (rated AAA, Stable), France (rated AA (high), Negative), Spain (rated A (high), Stable), and Italy (rated BBB (high), Positive), their very strong commitment to the Union, and the uplift from multiple sources of support, particularly from non-core AAA-rated member states. The creditworthiness of the core group could deteriorate if the Republic of France is downgraded following the current Trend change to negative directly impacting the weighted median credit rating used for the Support assessment, regardless of the upgrade of Spain's credit ratings. However, Morningstar DBRS takes the view that a potential downgrade of France's rating that stems from the elevated debt-to-GDP ratio due to weak fiscal results in recent years, will not impact cohesion and EU commitment among member states will remain strong. This perspective is strengthened in light of the common reaction of the EU to increase defence expenditure and the set of tools that likely will be available for this purpose.

The Stable trend reflects Morningstar DBRS' view that member states' commitment and ability to support the Union is expected to remain very strong, and that the multiple sources of support from the set of AAA countries outside the core group could still provide sufficient additional support to Union. The multiple sources of support benefit particularly from non-core AAA rated countries that represents 12% of the national contributions, and if called on up to 2% of their GNI, are likely to provide a sizable amount of resources. Morningstar DBRS estimates this equivalent of EUR 52 billion in 2024, which seems to be sizeable compared with an average annual debt repayment of EUR 45 billion for the next five years. At the same time, the EU benefits from conservative budgetary management and multiple layers of debt-service arrangements that protect creditors remain in place.

CREDIT RATING DRIVERS
The EU's credit ratings could be downgraded if one or a combination of the following occurs: (1) a marked deterioration in the creditworthiness of a single core shareholder, particularly if it reflects a material weakening in the cohesion of core member states or of the strength of their political commitment to the EU; (2) a rise in anti-EU sentiment due to a lack of cohesion that ultimately results in a material increase in the risk of the EU's dissolution; or (3) although unlikely given its Stable trend, a downgrade of Germany (AAA, Stable).

CREDIT RATING RATIONALE
A Potential Modest Weakening of the Core Shareholders' Rating Is not Expected to Undermine the Union's Credit Profile

The EU's AAA credit rating is primarily underpinned by its Support Assessment given its structure and primary funding sources. The Support Assessment reflects the creditworthiness of its core member states - Germany (rated AAA, Stable), France (rated AA (high), Negative), Spain (rated A (high), Stable), and Italy (rated BBB (high), Positive), their very strong commitment to the Union, and the uplift from multiple sources of support, particularly from non-core AAA-rated member states. Morningstar DBRS views the core shareholders' ability and commitment to support the Union as strong, despite the recent negative rating action on France's credit rating and does not expect any weakening of the cohesion of member states from this event. The rating action has been motivated by fiscal results and a maintained high level of debt. At the same time, there are some member states which credit ratings have improved such as Greece, Spain, Portugal or Cyprus.

Currently the weighted median credit rating of AA (high) for the core group is in line with France's credit rating, and eventually the creditworthiness of the EU's core member states could be impacted if France credit rating is downgraded. However, the EU enjoys the presence of a set of other AAA-rated member states, Morningstar DBRS considers their contributions and their eventual additional support to be sufficient to uplift the EU's Support Assessment at AAA under current debt level. Morningstar DBRS believes that the overall political commitment to supporting the institution's key functions is strong. This reflects the contributions of EU member states to the Union's budget and, as established by EU treaties and legislation, the shared joint responsibility for providing the financial resources required to service the EU's debt.

Geopolitical Risks and Broader EU Autonomy Drives Very Strong Political Commitment to the Union

In Morningstar DBRS' view, multiple shocks, including Russia's invasion of Ukraine have been met with strong political commitment and cohesion in the Union. Also, the mandate of the EU was further reinforced by the NGEU decision to provide the tools and resources to improve the resilience of the member states to face the pandemic shock. Similarly, the EU is setting a new tool consisting of around EUR 150 billion to increase national defence expenditure, as an attempt to increase the EU autonomy and to catch up on defence expenditure. This, to some extent, strengthens the incentive to provide support to the Union, specially from AAA countries outside the core group that have the ability to provide sufficient additional support to the Union. Moreover, the multiple sources of support benefit particularly from non-core AAA rated countries that, if called on up to 2% of their GNI, are likely to provide a sizable amount of resources. Morningstar DBRS estimates this equivalent of EUR 52 billion in 2024.

Budgetary Headroom Provides Comfort to Face the Rising EU Current Debt

To fund the NGEU programme the EU's debt has been rising markedly during the last three years, but Morningstar DBRS views positively the higher budgetary headroom along with the member states' commitment to introduce new EU own resources to repay debt. EU debt is expected to increase to a maximum of almost EUR 1 trillion up to 2026 from about EUR 601 billion (3.0% of EU27 GNI) at end of December 2024. Total NGEU debt will finance both grants and other NGEU non-repayable resources up to EUR 421.1 billion and Recovery and Resilience Facility (RRF) loans amounting to EUR 291 billion. These loans will be repaid by loan beneficiaries. Moreover, the increase in the EU's own-resource ceiling to 2.0% (of which 0.6 percentage points on a temporary basis until 2058, for NGEU) from 1.2% of EU GNI, provides the EU with significant budgetary headroom to meet its annual financial commitments.

The credit ratings are further supported by the EU's conservative budgetary management and predictability, which should remain sound despite the sizeable increase in debt. On a seven-year timescale, the Multiannual Financial Framework (MFF) benefits from established ceilings for commitment and payment appropriations for annual budgets during that period. This contributes to budgetary predictability and discipline.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a significant effect on the credit analysis.

Governance (G) Factors

The following Governance factor had a significant effect on the credit analysis: Institutional Strength, Governance and Transparency. This factor affects significantly the ratings assigned. The EU's institutional framework, reflected also by treaty commitments and a sound budgetary process, creates strong incentives for core member states to lend support and is a key credit strength.  
 
There were no Environmental or Social factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781.

RATING COMMITTEE SUMMARY
The main points discussed during the Rating Committee include the influence of the trend change on one of the core member states of EU, the credibility of their support committed, the magnitude of additional support from the multiple sources of support and the EU debt sustainability and current debt level.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology is the Global Methodology for Rating Supranational Institutions (16 February 2024) https://dbrs.morningstar.com/research/428245. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings, https://dbrs.morningstar.com/research/437781, in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for this credit rating include 2025 EU Budget, February EU Investor Presentation, European Commission. Morningstar DBRS considers the information available to it for the purposes of providing this credit rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: YES
With Access to Management: NO

Morningstar DBRS does not audit the information it receives in connection with the credit rating process, and it does not and cannot independently verify that information in every instance.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://dbrs.morningstar.com/research/450647.

This credit rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Jorge Espinosa, Assistant Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Global Sovereign Ratings
Initial Rating Date: 11 July 2014
Last Rating Date: 25 October 2024

DBRS Ratings GmbH, Sucursal en España
Paseo de la Castellana 81, Plantas 26 & 27
28046 Madrid, Spain
Tel. +34 (91) 903 6500

DBRS Ratings GmbH
Neue Mainzer Straße 75
60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.