Corona Bonds and the Weakening European Solidarity

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Image credit: Sangga Rima Roman Selia / Unsplash

The coronavirus outbreak in Europe is testing EU’s solidarity which was already challenged not so long ago by the 2008-09 economic crisis, the 2014 Ukrainian crisis, the 2015-16 influx of refugees and the Brexit. In any of these crises, while EU’s response did provide solutions, it came at the expense of challenging the effectiveness of the bloc to function as a cohesive unit. As the coronavirus pandemic intensifies and now that Europe has become one of its epicenters, concerns are being raised among European capitals to deal with the healthcare situation and the related economic problem in a manner that echoes a common European response. 

However, contrary to the concerns, the solution to the pandemic so far has been to go all alone. This is quite visible in the debates surrounding the issuance of joint European bonds or the corona bonds, which are being discussed to ease the financial constraints that the pandemic is going to have on the European economies. The article would discuss what exactly are corona bonds, the political differences making the debate and how it impacts the European solidarity in the current time.

What are corona bonds?

Corona bonds are bonds collectively issued by all eurozone countries- a sort of joint debt issuance for the eurozone. The idea behind joint debt issuance is attractive, at least on paper. For instance, the attractiveness of any bond issued in the market depends on guarantees. The investor must feel safe that the interest would be paid regularly, and the outstanding debt will be serviced on time. Public bonds – bonds issued by the government – are considered safe as they are backed by the state’s assets and its ability to generate sustainable capital through a well-structured tax mechanism. In other words, the more the investors feel confident the lesser doubts they will have on the guarantees and the lesser will be the risk premium that would be demanded. 

The risk associated with the bonds, therefore, impacts the country’s ability to borrow credit. In the case of Eurozone countries, certain member states run a high risk and thus the risk premium on credit is much higher compared to other member countries. This is in part due to the already accumulated high level of debt, sluggish economic growth, poor demographics and political uncertainties. A joint debt issuance would enable the high-risk countries to take advantage of being pooled alongside countries that are considered to be safe investments, given their low-risk standing and strong reputation in the financial market. Countries with a high percentage of debt to GDP like Italy or Greece would be able to borrow credit at the same premium as Germany or the Netherlands as the risk of the Eurobond will be much lower than their own national debt instruments. 

Club Med vs Frugal Five 

From the perspective of the weak economies in the eurozone, joint debt issuance sounds like a great idea with beneficial outcomes. It would enable them to generate more funds to support their budget spending, lower taxes and increase welfare spending without taking a heavy toll on their national debt. However, the same cannot be said about the strong eurozone economies. For them, the risk of being liable for the commitments of governments who may default on the debt is a risky venture, not worth undertaking. Moreover, the idea of debt communitization is highly unpopular among German and Dutch economist who argue that measures such as these can encourage irresponsible spending. There is also considerable public opposition especially in Germany, in putting the German taxpayer’s money on-line to help countries that are seen comparatively more spendthrift. Being the strongest economy in Europe, Germany is proud of its economic management, as it is the only eurozone member state to run a balanced budget. 

This difference is the reason why northern member states of the eurozone blocked the idea of joint debt issuance when it was first floated at the height of sovereign debt crisis in 2011. In an interview given to public broadcaster ZDF in 2011, German Chancellor Angela Merkel stated, “Eurobonds are exactly the wrong answer to the current crisis. They lead us to a debt union and not to a stability union”. The same difference of approach can be seen in the current debate over corona bonds. While the club med countries- a group comprising of southern eurozone member states- argued for joint debt issuance, the frugal five consisting of the Netherlands, Sweden, Denmark, Austria, and Germany argued against it and instead focused attention on other instruments such as suspending limits on public borrowing for member states and making use of the European Stability Mechanism (ESM). The frugal five argue that the ESM which has 410 billion euros in unused aid can be used as a preventative credit line. However, there is little clarity over how this mechanism would work. The conditionality it will come with would become a major sticking point between eurozone member countries. Italy has already made it clear that any conditionality on ESM funds is completely unacceptable. However, Germany and the Netherlands insist on imposing conditions on countries that would seek assistance. 

This difference of position was also reflected in the way they handled negotiations in the last week. On March 25, nine European countries Italy, France, Belgium, Greece, Portugal, Spain, Ireland, Slovenia and Luxembourg wrote a letter to the President of the EU council Charles Michel, asking for a common debt instrument to mitigate the damage caused by the coronavirus crisis. The President of the EU council responded by rejecting the proposal, at the same time suggesting that a better proposal was required to effectively handle the crisis thereby ensuring stability of the EU. This was followed by the virtual EU summit, the following day, wherein the frugal five blocked the idea of corona bonds. The meeting among the European leaders that was supposed to showcase bloc’s unity and solidarity was overshadowed by their bitter differences. The move to block any debate on joint Eurobonds served as a grim reminder of the heated discussions that happened a decade ago over the handling of the eurozone debt crisis. What made the situation even bitter was the raw fury over the initial unwillingness of other EU capitals to come to Italy’s aid with medical equipment.

Impacting European solidarity 

The push-back from the northern European countries in the face of Europe’s most serious crisis since world war II highlights a lack of solidarity that has been undermining the EU’s principle of shared values since the debt crisis of 2008-09 and migrant crisis of 2015. The approach adopted by the member states in the early days of the pandemic saw border controls being reintroduced and reluctance in sharing medical equipment with countries like Italy and Spain that suffered the deadliest blows. Coronavirus has started as a medical crisis, which will soon turn into an economic crisis, as economists are predicting. An economic crisis of the current magnitude has the potential of turning into a political crisis impacting relations between the different levels of the political structure, i.e. between the citizens and the state, between state and states and between institutions and the state. Europe is not new to such unfolding. The idea behind forming the EU was to ensure that peace and prosperity remains on the continent. The coronavirus pandemic has the capability to challenge that grounding principle unless Europeans act together.

The views and opinions expressed in this article are those of the author.