Business in Times of Corona: Pandemic Puts Eurobonds Back on the Table

The leaders of nine Eurozone countries on Wednesday refloated the previously discarded idea of issuing Eurobonds, a collective debt instrument backed by the combined securities of participating countries, as a way of pooling risk and mitigating the economic impact of the corona pandemic. The appeal to revisit this divisive hot-potato topic was released on the eve of a key conference call between the 27 EU heads of government to discuss the steps that need to be taken in order to combat both the virus and the impending recession.

The nine Eurobond-proponents [1] argue that all member states should be able to raise funds on the market under the exact same conditions. They also state that the severity of the current crisis calls for ‘further action’ to buttress economies affected by the pandemic. Moreover, the nine point out that the Eurozone faces a ‘symmetric external shock’ for which no single country bears responsibility but ‘whose consequences are endured by all’.

Whilst none of the 19 Eurozone participants has objected to the lifting of debt ceilings, deficit limits, and fiscal restraints, the mutualisation of sovereign risk remains a ‘phantom discussion’. That is how German economy minister Peter Altmaier described the idea first tabled by Italian Prime Minister Guiseppe Conte who suggested branding the debt paper as ‘corona bonds’. After Ursula von der Leyen, head of the European Commission, commented that Brussels was ready to consider backing the issuance of common debt, the alarm bells instantly went off in both Berlin and The Hague.

Though a confidante of Angela Merkel, Mrs Von der Leyen had clearly failed to coordinate her response with the chancellor. A beginner’s mistake, perhaps, but a serious faux pas, nonetheless. Though only a discrete fifth wheel to the Frugal Four (Austria, Denmark, Sweden, and The Netherlands), an impromptu group of member states that oppose EU largesse, Germany has of course the last word on the introduction of any shared debt instrument. The country may have loosened its own fiscal straitjacket to keep the economy on an even keel, Germany is not about to put its enviable credit rating at the disposal of the less fiscally prudent member states.

In The Hague, Eurobonds top Prime Minister Mark Rutte’s list of taboo topics. He is not only dead set against the idea on a peronal level, but also realises full well that the Dutch parliament would not even contemplate such a dilution of the country’s hard-won top credit rating. Fiscal prudence, and its twin austerity, may have taken a backseat for now, as a concept it remains the guiding principle. Mr Rutte has also voiced his government’s strong opposition to milder derivatives of the Eurobond-idea such as a bundling of stronger (Dutch and German) and weaker (Italian, Greek, and Spanish) sovereign bonds.

The argument used to shoot down any form of mutualised debt remains an almost unaltered version of the Aesop fable featuring thrifty ants and a happy-go-lucky grasshopper: Had the weaker Eurozone member states used the preceding ‘fat’ years to pay down their national debt and balance fiscal accounts, they would now possess the wherewithal needed to meet the emergency.

The Germans and Dutch are not swayed by the arguments of ECB President Christine Lagarde who pleads for a common approach to the pandemic: “Markets are looking for assurances that Eurozone members are willing to support each other.” Ms Lagarde noted that the painfully slow response to the 2008 banking crisis nearly caused countries such as Greece, Portugal, and Cyprus to default on their euro-denominated debt which, she warned, would probably have finished off the common currency altogether.

However, the parliaments of Germany, The Netherlands, Finland, and Austria are in no mood to issue a blank cheque to any government but their own. Even the relaxing of the stringent rules attached to the European Stability Mechanism, the €410 billion emergency fund set up to deal with the banking crisis, is not likely to meet with the approval of lawmakers in those countries.

The corona pandemic shows that there are well-defined limits to cooperation and solidarity within the European Union. Also, when faced with an existential threat, member states put their national interest invariably first and largely ignore Brussels. Some 60 years after the start of the European project, the nation state still trumps the ‘ever-closer union of the peoples of Europe’.

The reason parliaments of ‘stingy’ member states remain almost virulently opposed to collective debt instruments can be traced to the last financial crisis and the way it was tackled. A large number of people vividly remember how banks ‘too big to fail’ were rescued with taxpayer money which was then paid for in austerity and the dismantling of the welfare state. Chief Economist Christian Ondahl of the Berlin-based Centre for European Reform points out that the narrative has not changed: “Most Germans refuse to challenge the austerity dogma and take pride in the fact that past sacrifices now pay off.”

The paymasters of the EU, then, refuse to apply their newfound appreciation of Keynesianism outside their borders. In fact, the Germans and Dutch suspect that more profligate EU member states have probably not read the book [2] in its entirety and skipped over Mr Keynes’ admonition that government debt incurred during a downturn should promptly be paid off when the economy returns to growth. In today’s terminology, it is all about ‘flattening’ the curve by shaving off peaks on both sides of zero.

However understandable, the reluctance to embrace collective solutions poses a threat to the European project inasmuch that it hollows out the EU and condemns its neglected stepchildren in the south to lasting penury – dividing the union into two or more unequal parts and raising questions about the union’s practical uses. Once the present crisis has abated, Eurosceptics in France and Italy may gain still more traction amongst wary constituents. Given the near-complete absence of the European Union in one of the most trying times lived since the end of World War II, a debate will be necessary on the future scope of the project and its long-term goals.

However, the pandemic must not be allowed to undermine the European Union for one of the few certainties currently available is that whatever shape the post-corona world takes, it will still be dominated by raw power politics. No individual European nation, not even Great Britain with its undeniable pluck and brawn, is able to face down the likes of the United States and China. Lest Europe wishes to become a collective of quarrelling rule-takers, coordinated collective action on a wide range of issues remains of vital importance to the interests of the continent. Whilst comprehensible in light of the almost unprecedented threat to public health, reverting to the nation state as the mother of all policy is unwise and short-sighted. However unpalatable to German and Dutch taste, Eurobonds are probably the least painful remedy to a malaise that, in one form or another, ultimately affects all.

[1] Belgium, France, Greece, Italy, Ireland, Luxemburg, Portugal, Slovenia, and Spain.

[2] A Treatise on Money by John Maynard Keynes.