The Eurobond is for the Eurozone what Brexit has been in the United Kingdom: the determining ideological problem. No one ever changes their mind on this, at least not after reasoned debate. You are here or there.
Last week, nine EU leaders wrote a letter to Charles Michel, President of the European Council, asking for pooled assets to share part of the direct tax costs of the coronavirus pandemic. As expected, the European Council refused to act on this request.
No crisis is ever large enough to prevent European member states from putting their narrow interests first. Wopke Hoekstra, Dutch Minister of Finance, even took the opportunity to denounce what he considers to be the past tax debauchery of certain Member States. He invoked the standard argument: a Eurobond would produce moral hazard. Among German and Dutch economists, the idea that a safety net encourages irresponsible spending is a popular concept. More often than not, hiding deep prejudices and distrust of strangers. Although not everyone is as clumsy as the Dutch Minister of Finance, the feeling is shared in his country and in Germany as well.
For France, Italy, Spain and the rest of the nine eurozone countries calling for “coronabonds”, there is a way to go. They could set up a shared link supported by themselves, in a coalition of volunteers. They could then encourage the European Central Bank to buy these securities as part of its emergency purchasing program in the event of a pandemic. Legally, a debt instrument mutualized between a group of sovereign states would always be considered as a national debt. The repayment obligation would be shared.
This would not reduce the debt burden of vulnerable member states in a way EU-wide instrument could. But, at the very least, it would set a precedent and raise money.
This is an opportunity and a risk. The bonds supported by the nine countries can be seen as a precursor to a future split. Since the eurozone crisis, I think Germany will only act to help others when it perceives an existential threat to the eurozone.
If the members are not ready to withdraw, nothing will ever change. If the nine in the eurozone choose to play it safe, they will miss the moment. I note with interest that the Italian and Spanish Prime Ministers acted jointly when they rejected the draft European Council conclusions last week. It is a confrontation that absolutely must happen.
What would such a shared bond do? At the start of the eurozone crisis, I argued in favor of a eurozone bond as a risk-sharing arrangement – the need for which has now become evident. The goal of a single “coronabond” should go far beyond simple insurance, or even the payment of health expenses. I think the funds should be used for a post-crisis investment program.
As the German Constitutional Court keeps reminding us, decision after decision, budgetary policy is a national prerogative. If the nine countries want to take the mutual route, they can. It is a risky choice, but not as risky as taking refuge under the rescue umbrella that the eurozone put in place after the last crisis.
In this precedent, when Member States in need of cash request emergency funding for the European Stability Mechanism, they must submit to budgetary surveillance. Italy and Spain should accept erosion of fiscal sovereignty, perhaps for generations, even as Germany, the Netherlands and Finland return to large budget surpluses against the rest of the euro area and the rest of the world.
I don’t think it’s sustainable. Italy could easily end up with a debt-to-gross domestic product ratio of almost 200% once the crisis is over. With high unemployment, low growth and no fiscal sovereignty, this would be fertile political ground for those on the right who are pushing him to leave the euro.
Remember how the majority of Brexit originated in the UK. Leaving the EU started as a marginal project of the nationalist right. He won because he attracted sufficient support from the political current and certain parts of the left. Whether you are pro or anti-European, it is not rational for countries to choose economic arrangements which harm their interests.
It is no coincidence that the nine countries looking for a shared obligation – Portugal, Ireland, Greece, Slovenia, Luxembourg and Belgium are the others – are largely geographically connected in the south and western euro area.
We do not know whether the monetary union will split and, if so, whether a split would be clean or disorderly. But if that happens, we know where the line will be drawn.