Coronabonds or bust?
Gridlock over EU response poses an existential threat
by Duroyan Fertl
The European Union’s response to the coronavirus pandemic has exposed a dangerous lack of solidarity between member states, as longstanding divisions over the future of European integration frustrate the fight against the coronavirus and the downturn it has caused – the worst since the Great Depression. After weeks of bungled responses, old fault lines between “north” and “south” have re-emerged, a marathon Eurogroup meeting on April 7 failing once again reach agreement. The European Union (EU) sits perched uncomfortably on an economic and political precipice, and the consequences could be massive.
The coronavirus pandemic has triggered a human catastrophe and economic crisis worldwide, with panicked lockdowns grinding economic gears to a near-halt. The global economy – already heading into a downturn when the coronavirus struck – is now experiencing a crisis that reaches deep into the productive sector of the economy, but the EU response has been patchwork and incoherent, a series of reactive and inadequate measures not equal to the scale of the problem.
The initial response came from national governments, most of whom instinctively closed their borders, locking down society and – eventually – industry. As the walls went up, desperate appeals from Italy for assistance fell on deaf ears, unheeded by all but China and Cuba, and Italy’s ambassador to the EU, warned that Europe’s leaders risk “going down in history like the leaders in 1914 who sleepwalked into World War I”. It was beginning to look like “European solidarity” was an idea for fairer weather.
The EU’s response
The European institutions shifted clumsily into catch-up mode, the European Central Bank (ECB) proposing a package of 120 billion euro to ensure liquidity in the financial and banking sector the same day that its President Christine Lagarde declared the central bank was “not here to close spreads” in sovereign debt markets. This brought a furious response from Italy, casting doubt on whether the ECB would provide member states the necessary support.
The ECB then announced its “bazooka” response – a €750 billion package of Quantitative Easing (QE) named the “Pandemic Emergency Purchase Programme” (PEPP). To allow the rapid expansion of public debt and facilitate heavy government spending, the ECB can buy large amounts of government and corporate debt until the end of the year, with significantly more flexible rules than previously. It suspends the 33% purchasing limit on national bonds, includes Greek sovereign debt and the ECB will target short-term debt maturing in as little as 70 days. State aid rules have also been loosened.
Crucially, the “general escape clause” of the EU’s Stability and Growth Pact (SGP) was activated – pausing a mechanism responsible for imposing austerity on member states through inflexible deficit and debt limits and structural reforms. Unprecedented stuff – but still not enough, and concerns remain about what the short duration of the PEPP will mean for EU member states’ capacity to service the resulting debt during a recession.
The burgeoning crisis quickly spilled over into a high-stakes political showdown across the EU. When the Eurogroup – the eurozone’s finance ministers – met on March 24 to draft a longer term “pandemic crisis support” tool. The main proposal was fresh loans under the European Stability Mechanism (ESM), the EU’s 410 billion euro bailout fund that allows eurozone members to draw a credit line worth 2 percent of their economic output – with conditions. This option is strongly supported by fiscally more conservative countries, like Germany and the Netherlands.
Corona bonds and debt liability
For the likes of Italy and Spain, however, the ESM means austerity and the negative stigma of bailouts during the last crisis. Instead, they proposed creating a common debt instrument using special eurozone bonds with long maturities, dubbed “eurobonds” or “coronabonds”. Spreading debt liability and risk across the eurozone, these would allow governments to borrow and spend more easily to prevent a deeper crisis, while avoiding crippling national debts and austerity measures.
Eurobonds are no silver bullet, nor are they new. A repeated demand of proponents of deeper European integration, they represent a significant step towards a full monetary and fiscal union in the eurozone. During the 2010-12 debt crisis, many – especially in southern Europe – saw them as a potential solution, while Germany’s Angela Merkel has declared that there would be no such instruments “as long as I live”. On the other hand, ECB President Christine Lagarde, her predecessor Mario Draghi, European Parliament President David Sassoli, OECD Secretary General, Ángel Gurría, and numerous economists have all lent their support to the idea.
For eurobonds supporters, the current crisis is an ideal opportunity. The coronavirus crisis is a clear example of a so-called “exogenous shock”, where “moral hazard” arguments – of not rewarding bad behaviour and giving irresponsible governments cheap credit – shouldn’t apply. There is no moral risk in Italy or Spain running huge deficits to avoid coronavirus deaths and recession, as no one “blames” Italy or Spain for this crisis the way Greece was blamed for theirs. It’s difficult to moralise during a pandemic.
Difficult, but not impossible. Germany and the Netherlands still oppose eurobonds, unwilling to accept shared debt without the power to impose further structural reforms. Domestic considerations are also important. Eurobonds would signal the EU becoming a “transfer union”, and countries like Netherlands and Germany – their economies having benefitted greatly from existing arrangements – would stand to lose out, while Italy – which has gone backwards after 20 years in the eurozone – would be strengthened.
Undeterred, on March 25, leaders of nine eurozone countries – led by France, Italy, Spain and Portugal – co-signed a letter calling for the creation of such a mechanism. The March 26 European Council meeting the following day was like Groundhog Day, with Finland and Austria joining Germany, and the Netherlands to block the proposal. Again, a new emergency credit line from the ESM was proposed, and again Italy, Spain and others objected. Eventually all reference to the ESM was removed, and the can was kicked down the road the road for two weeks until the Eurogroup meeting.
Nothing resolved, the rhetoric has only increased. Eurobonds supporters went onto the offensive, Italy’s Conte arguing that “If Europe does not rise to this unprecedented challenge, the whole European structure loses its raison d’être”. On the counter, Merkel declared “the ESM is the preferred instrument”, and Dutch Prime Minister Mark Rutte signalled a refusal to countenance eurobonds under any circumstances. When Dutch Finance Minister Wopke Hoekstra suggested EU member states should be investigated for not having budgetary capacity to deal with the pandemic, Portugal’s Prime Minister António Costa lashed out, describing the statements as “repulsive” and “senseless,” and warning this “recurring pettiness threatens the future of the EU.”
European Commission President Ursula von der Leyen also dismissed eurobonds as simply a “slogan”, and supported German reservations about the whole concept. She backtracked, but only after confirming for critics that she is little more than a proxy for German conservatives. Shaken, the European Institutions sought to regain the momentum, announcing new schemes including 200 billion euros in European Investment Bank loans, the redirection of 37 billion euros from existing funds, and a 100 billion euro short-term unemployment scheme to support wages and businesses.
A Marshall plan for Europe
When Spanish Prime Minister Sánchez called again for a “Marshall Plan for Europe” on April 5, von der Leyen echoed the language, suggesting the 2021-2027 Multiannual Financial Framework (MFF) – the EU’s seven year budget – be given that role. The language was similar, but the proposal was a deflection. MFF negotiations are at a standstill, and funds run out at the end of the year. Von der Leyen’s suggestion that member states pay in additional billions of euros, exactly when their economies are rapidly contracting, also displays a counterproductive logic that would further complicate existing problems around sovereign debt.
Like the original Marshall Plan, any modern iteration of that scheme would likely be as political as it is economic, deepening integration across the bloc, and almost certainly bringing national budgets under increased control from Brussels. It is hard to see any such scheme being agreed to until the current fault-lines are overcome.
And so on Tuesday night the ball was back in the Eurogroup’s court. Despite claims that an agreement on a package totalling 500 billion euros was close, the fourteen hour long teleconference was suspended in the early morning and postponed until Thursday. While France and Germany said they could live with that most EU of outcomes – a fudge – the blocs led by Italy and the Netherlands refused to drop their red lines – common debt issuance on the one hand, loans under the ESM on the other. Italy also pushed for an overhaul of the ESM to remove all conditions on the loans, and allow a compromise. The Netherlands and others refused, insisting that the tools already on the table are sufficient. France, trying to reach a compromise, proposed a one-off fund that could raise debt and issue loans to governments, but even a reference to possible future “innovative financial instruments” was too much to accept for the Dutch.
While the EU has temporarily suspended some of its damaging obsession with austerity, allowing some intervention in crucial sectors, this stubborn inability of both the European institutions and the EU’s stronger economies to move beyond the existing framework, even in crisis, is posing an existential threat to the future of the EU. Faced with a pandemic and severe economic crisis, Italy and other member states may feel compelled to act independently, potentially threatening the integrity of the eurozone. Conte has declared that Italy – now facing its worse crisis since the second world war – would rather go it alone than accept loans under the ESM with further disciplinary terms. They fear – rightly – being punished for a disaster that was beyond their control, while subjected to a subpar financial mechanism not fit for purpose.
A defining moment for the EU
Caught between national self-interest and European integration, Italy needs more than just vague promises and more condition-laden debt. If the sheer scale of the crisis doesn’t shock more complacent member states into a generous act of solidarity to repair the damage, there is a mounting fear that support in Italy for the EU is lost. A survey in March found 67 percent of Italians believed being part of the EU was a disadvantage, and many feel increasingly abandoned by their neighbours.
If Italy, with a debt-to-GDP ratio already at 136 per cent, ends up with a compounded debt burden, high unemployment, low growth, and no fiscal sovereignty – plus the trauma of over 15,000 dead from coronavirus – it will be fertile political ground for a neofascist far right already on 30 percent support. In France, where 70 percent believe the government has botched the response, the far right senses blood too, and similar conditions are building in Spain.
This is likely to be a defining moment for our generation – and for many to come. Many more economic and political taboos need to be broken if we are to address the ballooning crises in a socially and environmentally just way. Without a deep social transformation and the radical extension of democracy, the public spending necessary to overcome this crisis will be redirected straight into private sector profits and renovating a capitalist system that is intrinsically geared to crisis, while marginalising voices for change and threatening new levels of austerity. The left has both the opportunity and the urgent responsibility to put forward and win support for a coherent alternative. If not now, then when?