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Coronabonds: A solution to current and long-standing challenges
Andreas Eisl
Research Fellow on European Economic Policy, Jacques Delors Institute
The coronavirus crisis demands an unprecedented budgetary response to keep European economies afloat during lockdowns and to support their recovery after the crisis. These efforts will have to be financed by new public debt. But uncoordinated budgetary measures across the European Union risk to worsen economic fragmentation between its member states, already at worrying levels since the last economic crisis. Thus, fiscal burden-sharing will be needed to avoid a break-up of the eurozone and ensure a balanced recovery across Europe. The available instruments at the European level are, however, inadequate to deliver on such a common budgetary response.
The idea of coronabonds is not to mutualise pre-existing national debt but rather to share the costs of the current crisis
That is why ‘coronabonds’, the common issuance of debt on the European level, are needed. The idea of coronabonds is not to mutualise pre-existing national debt but rather to share the costs of the current crisis. In contrast to loans provided by the European Stability Mechanism, coronabonds would be disbursed in the form of grants. Member states would receive these grants according to their individual macroeconomic needs and to that of the Union as a whole. Grant decisions would be taken at the European level and follow clear and transparent criteria. Importantly, the provision of grants implies that coronabonds would necessarily include a transfer element. Repayment of the commonly incurred debt would be shared according to the economic strength of member states and spread out over time, either through a very long-term debt issuance or the creation of perpetual bonds.
Set up in the right manner, coronabonds could address several current and long-standing challenges.
First, budgetary support through grants would not count as national debt. This would help to keep counterproductive market pressures at bay. Grants would also avoid excessive consolidation demands from fiscal rules when their suspension will be lifted after the crisis.
Second, coronabonds would allow the European Central Bank to buy up supranational debt, lifting concerns of financing individual eurozone member states against existing EU treaty law.
And finally, situating decisions on grant disbursements on the European level could provide – at least on a temporary basis – a centralized macroeconomic stabilization function, which is desperately needed in the eurozone and beyond. If this approach is deemed successful, it could also serve as a blueprint for the response to future deep recessions and become a lasting tool of macroeconomic management and coordination across the EU.
This approach could serve as a blueprint for the response to future deep recessions
There is much that speaks for the introduction of coronabonds. It now mainly depends on the willingness of political actors across member states to go this important step forward. The severity of the coronavirus crisis demands bold decisions rather than muddling through.
AGAINST
Eurobonds in time of corona
In the context of the current health crisis, a Eurobond, now rebaptised coronabond, cannot provide any service that existing tools could not provide at a flick of a switch, namely the European Stability Mechanism’s (ESM) ample arsenal. For all intents and purposes, the ESM is an issuer of Eurobonds. Its debt obligations are jointly underwritten by Euro area governments through their commitment to inject capital should that become necessary. The ESM is an institution ready to deploy its substantial financial firepower. All that is lacking is Euro area leaders coalescing around an agreement to instruct it to do so.
European citizens are looking at their governments for leadership, not for experiments
Trying to launch eurobonds now is going to be a lengthy and acrimonious process, taking more time than is available as there is a concrete emergency at hand. It would also be an unforced embarrasment, when the coronabonds were to be issued with a credit rating well below the ESM’s AAA-rating. That outcome is highly likely unless cross-default clauses with German bunds were to be written into the debt contract. The German government would resist such a clause not least because of concerns that its constitutional court might declare such a structure unconstitutional. More than ever before, European citizens are looking at their governments for leadership, not for experiments.
If the idea behind coronabonds is to financially support the most afflicted countries and regions, we should be honest and open about it. Why not set up a catastrophe fund at the EU-level (after all, the virus is not only an issue affecting euro area members!) that can disburse long-term funds to countries most affected, including a subsidy element to mitigate potential risks to debt sustainability. It would be a cost for everybody else not drawing from the fund. But that is the idea of solidarity and support!
Coronabonds are a more roundabout and opaque transfer mechanism
There may be reluctance to put money on the table. If that is the case, then coronabonds, which are a more roundabout and opaque transfer mechanism, will not fly either. Then better make use of the powerful instruments already in place. The ESM can target the countries most in need of support, without imposing harsh conditionality. If it comes to the worst, the ESM’s involvement would be the necessary precondition for the ECB to unleash its Outright Monetary Transactions (OMT). It has never been used, but it is Europe’s most powerful tool. That’s what it takes.
