Morningstar DBRS Confirms the European Union at AAA, Stable Trend

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

KEY CREDIT RATING CONSIDERATIONS
The Stable trend reflects Morningstar DBRS' view that member states' commitment and ability to support the Union is expected to remain strong, despite rising debt and economic and geopolitical risks. The projected material increases in EU debt to a maximum of almost EUR 1.1 trillion, mainly as a result of the Next Generation EU (NGEU) temporary instrument, will likely generate high debt service costs in the future. Nevertheless, the increase in the budgetary headroom, the obligation of member states to finance the agreed expenditure levels and the system of EU own resources and repayments from loan beneficiaries, should comfortably enable the Union to repay its debt.

Morningstar DBRS rates the EU based on its Support Assessment of AAA. This is underpinned by the creditworthiness of the Union's core member states, their strong commitment to the EU, and the uplift from multiple sources of support, particularly from non-core AAA-rated member states. Furthermore, the EU benefits from conservative budgetary management. Moreover, multiple layers of debt-service arrangements that protect creditors remain in place, despite the significant rise in debt following the introduction of the NGEU programme and the Union has a de facto preferred creditor status.

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

Higher Challenges from the Geopolitical Tensions Have Driven the EU to Support Member States into Increasing Defense Expenditure

The increase in geopolitical tensions has raised defence spending pressures but, at the same time, is also likely to foster cohesion among EU member countries. Several EU countries have started to ramp up defence expenditure following the outbreak of the Ukraine-Russia conflict. Furthermore, the announcement of the U.S. administration to halt military aid to Ukraine triggered the reinforcement or supplementary action from the EU to support Ukraine. This in combination with NATO's discussion among all members to increase defense expenditure above the current 2% of GDP commitment, likely towards somewhere in between of 3-5% of GDP in the medium term, triggered the reaction of the EU. The Union has designed the ReArm Europe Plan which aims to accomplish these objectives by 2030. The plan is based on three main elements ranging from the common strategy outlined in the white paper, a common financing framework based on a loan programme called SAFE and ultimately the activation of the temporary escape clause. Morningstar DBRS is of the view that the common plan developed by the EU reinforces cohesion among member states and supports credibility towards achieving the common objective of increasing defense expenditure without derailing the overall objective of political and economic stability.

The Union has decided to use its borrowing capacity to incentivize the common procurement on defense expenditure, similar to what was done with the Recovery and Resilience Facility. The SAFE programme consists of a total envelop of EUR 150 billion and is expected to be adopted prior to summer 2025. The Union will provide long-term loans to member countries with a ten-year grace period from the disbursement and a linear repayment horizon of 35 years. The financing of this programme will be through the EU budget and is subject to priority repayment that is covered with the current budgetary headroom of the EU. The use of the proceeds includes certain defense related expenditures such as innovation, infrastructure or military transport but remains constrained to be used for unlimited military expenditure as per the article 41.2 of the Treaty, avoiding the use of common EU budgetary resources into any warlike decision that remains solely at the discretion of the sovereigns.

Tariffs Have Weakened the European Economic Outlook but Unity Softens Overall Consequences

The economic outlook for EU economies has been weakened by the recent increase in U.S. tariffs and the accompanying uncertainty on the duration and scope of higher U.S. tariffs which are likely to weigh on EU exports and investment activity. In March 2025, the European Central Bank revised down its 2025 real GDP growth forecast for the Euro area to 0.9%, which is 0.2% lower than in the December forecast. In general, the magnitude of potential economic headwinds is likely to vary across EU economies, depending on the structure and shock absorption capacity of different EU countries. In view of the latter, Morningstar DBRS takes the view that the EU will benefit from the diversification provided by its 27 member states and expects the EU to set further protection programmes that could incentivize investments under a more stressed economic scenario. The EU has demonstrated a good ability to navigate severe economic shocks, such as the latest from the pandemic and that stemming from the Ukraine conflict, and the Union has announced that the commission will take the necessary actions to protect the economy.

Fiscal Consolidation Might be Impacted by the Geopolitical and Economic Challenges Though Just Delayed

The EU seeks to give member countries more fiscal leeway for coping with rising defence spending pressures under its new economic governance framework. The escape clause has been activated with a maximum of 1.5% of GDP additional defence expenditure over the already committed fiscal results, under request of member states before April 2025. The escape clause will remain activated for a period of four years, matching the default duration of the national medium-term plans agreed with the EU. This measure is deemed necessary as it enables member countries to step up defence spending more quickly over the next few years. After the transition period of four years, however, higher defence spending levels would need to be offset by fiscal consolidation measures. This, in turn, would ensure that prudent fiscal policies among member countries remains one of the priorities of the Union.

Budgetary Headroom Provides Comfort to Face Rising EU 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 (3.3% 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. Additionally, the SAFE program will increase the outstanding debt progressively by a maximum of EUR 150 billion before 2030 and will continue to be covered by the budgetary headroom which is the difference of the standard EU's own resource ceiling of 1.4% of GNI and actual annual budget expenditure which usually is around 1% of member states' GDP.

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. The EU does not benefit from any paid-in capital; however, its debt-servicing capacity is backed by multiple arrangements that protect creditors. All EU borrowings, despite the significant increase scheduled in the Union's obligations, will continue to be covered by the EU's available resources. These can be prioritised for debt service whether or not they have been committed elsewhere. Moreover, member states can be called on to provide the funds needed to repay the debt and to balance the budget up to the permanent own resources ceiling of 1.40% of the EU's GNI (estimated at around EUR 248 billion in 2024) whereas, only with regard to liabilities stemming from the NGEU, member states can be called to provide funds up to an additional 0.6% of the EU's GNI (estimated at EUR 106 billion, of which EUR 66 billion stems from core members for 2024). This appears to be comfortable considering that, under this scheme, principal annual debt repayments will not exceed 7.5% or EUR 29.25 billion of the EUR 390 billion in NGEU grants (in 2018 prices). Moreover, Morningstar DBRS recognises the EU's de facto preferred creditor status¿if debtors face payment difficulties, debt repayments to the EU will likely take priority over funds owed to private or other bilateral creditors.

Member States Commitment to EU Obligations Remains Very Strong and the EU Rating Continues to Be Driven by Support Assessment

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 in recent years such as Greece, Spain, Portugal and 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`s 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.

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 at (13 August 2024) https://dbrs.morningstar.com/research/437781.

RATING COMMITTEE SUMMARY
The main points discussed during the Rating Committee include EU policies regarding defence expenditure, EU new loan programmes, EU budget and progress on MFF, EU debt repayments, NGEU programme, new EU own resources, EU challenges, core shareholders' commitment, EU members cohesion, EU funding approach.

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 EU budget funding plan Jannuary-June 2025 (December 2024), EU Investor presentation (March 2025), Half-yearly report on implementation of borrowing, debt management and related lending operations pursuant to Article 13 of Commission Implementing Decision C(2023)8010 (March 2025), budgetary guarantees, common provisioning fund and contingent liabilities COM(2024)300 (June 2024), White Paper for European Defence - Readiness 2030, Press Release -Accommodating increased defence expenditure within the Stability and Growth Pact ( March 2025), Press Release - The Road to the next multiannual financial framework (February 2025), Press Release - Commission welcomes political agreement on a new economic governance framework fit for the future (February 2024), Press Release - EU budget: Commission puts forward an adjusted package for the next generation of own resources (June 2023), European Parliament In-Depth Analysis - What role for the European semester in the recovery plan? (October 2020), Long-term forecast of future inflows and outflows of the EU budget (2021-2027) (June 2021), European Parliamentary Research Service - Revision of the EU's long-term budget for 2021 to 2027 (September 2023), Long-term forecast of future inflows and outflows of the EU budget (2024-2027) (June 2023), 2021 EU Budget, 2022 EU Budget, 2023 EU Budget, 2024 EU Budget, European Commission, AMECO, IMF WEO, Ministry of Finance, IMF, World Bank. 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/452586.

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: 26 March 2025

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