Coronabonds: Eurobonds Redux in Times of COVID-19

As the Coronavirus pandemic continues to affect European countries – and the most affected countries are simultaneously the more indebted Eurozone countries, the issue of mutualized debt has once again been put on the agenda. Spain and Italy argue that the 19 eurozone countries should endorse so-called Coronabonds. These bonds would be issued conjointly with all nations that hold the common currency, and would allow those with public finances in bad shape to get cheaper credit. In an online European Council meeting in March, Germany, the Netherlands, Austria, and Finland opposed the idea – and rightfully so.

Coronabonds are merely a rebranding of the eurobonds idea that was floated in 2011. During the 2009-2012 European sovereign debt crisis that was triggered by the financial crisis of 2008, the European Commission under José Manuel Barroso believed that mutualized debt was the only way to prevent the continent from looming defaults. Greece had to be stabilized with multiple loan guarantees that were stacked with high interest rates due to Athens’ bad credit rating. A Reuters poll in 2011 indicated that some 41 out of 59 economists said a common eurozone sovereign bond would be a good long-term solution to resolve the crisis, with 36 out of 60 analysts expecting eurozone leaders to eventually agree to its issuance. They were proven wrong, as eurobonds failed over the objection of German Chancellor Merkel and Dutch Prime Minister Mark Rutte (you’ll note that both are still in office today). The Netherlands and Germany were afraid that those with unchecked public finances were going to free-ride off of the fiscal responsibility of others.

As expected, many have voiced their support for Coronabonds, ranging from the Dutch Labour Party leader in Politico, to (of course) The Guardian, which argues that “by rejecting the call for ‘coronabonds’, the Netherlands and its partners in the frugal four have undermined the ability of the wider eurozone to fight the pandemic as a whole – threatening the health and wellbeing of each of its members in turn.” Ah yes, the evergreen ‘people will die if you don’t agree with me politically’ shtick. How expected.

One might wonder why Spain and Italy aren’t content with the existing funds activated by the European Central Bank (€750 billion) and the €400 billion in the European Stability Mechanism (ESM). It turns out that the ESM has requirements towards the fiscal goals that these countries need to achieve following payments, which would compel them to do more thorough fiscal reforms. Looking at how Greece saw a complete change in their political landscape after it received financial aid and reformed the country (none of the existing political personnel was viable anymore), neither Prime Minister Conte of Italy or Prime Minister Sanchez of Spain are excited about the notion of accepting this cash. However, mutualized debt would exempt them from similar obligations, which is why they are in favor of it.

However, even if Europe’s southern states manage to convince the European Council to agree to Coronabonds, it is unlikely that this would come without conditions. Back in 2011, Norbert Braems, chief economist at Oppenheim Research in Cologne, said that “that one pre-condition for the introduction of common euro bonds is the access of the EU to budget controls in the countries,” and that that could involve an automatic mechanism to punish misbehavior in national fiscal policy, or debt limits anchored in every country’s constitution. We would have to see how enthusiastic this is going to make Spain and Italy towards common European debt.

In an effort of being thorough, let’s not forget that mutualized debt already does exist. The European Stability Mechanism issues bonds, which is how it raised €4 billion in 2016, with an interest rate of 1.125% which will mature on 3 May 2032. Lead managers on the deal? Goldman Sachs International, Morgan Stanley and UniCredit.

Needless to say that Coronabonds would further aggravate this situation, and open doors towards more fiscal irresponsibility for a large set of European nations. With EU leaders set to meet again on the issue in two weeks, let’s hope that the Dutch coalition of four will remain in place.