Cinzia AlcidiSenior Research Fellow and Head of the Economic Policy Unit at the Centre for European Policy Studies
It should, in a certain way.
Italy and Spain, the EU countries hit hardest by the coronavirus pandemic, are the countries with the most limited space for response. Spain just recovered from one of the deepest financial crises in its history, while Italy has one of the highest debt-to-GDP ratios in the EU. Certainly the largest in absolute terms, and this has been the case for decades.
It is the Italian case that makes any option entailing mutualization of preexisting debt (eurobonds) politically unfeasible. And, I think, rightly so.
The so-called coronabonds proposal to issue common bonds to finance the response to the crisis has been associated with eurobonds and quickly dismissed politically. Not least because of Italy’s tactical mistake to insist on eurobonds and reject other options.
The strategy of French President Emmanuel Macron is essentially to find a way to act and overcome the political impasse. His proposal of a joint fund is one among others but has two important features. It would not contribute to increasing national sovereign debt further and it would be an important political signal.
Hopefully, Italy will use this opportunity for the common interest of the country and to renew its relations with the EU.
Krzysztof BledowskiSenior Council Director and Economist at the Manufacturers Alliance for Productivity and Innovation
Common debt will be hard to issue under the current political setup of the EU.
The sudden cry for help from the EU by governments most stricken by COVID-19, the disease caused by the new coronavirus, brings back memories of the 2009–2012 sovereign debt crisis. Then, the meltdown almost crushed Greece, which the European Central Bank (ECB) saved with then president Mario Draghi’s “whatever it takes” moment. Now, Macron warns that the European Union itself is at a “moment of truth” and must decide whether it is a political project or just a market project.
This is the wrong alternative. The EU has always been a political project that built up a common market along the way. Unfortunately, European leaders failed over the years to explain to their constituents what the EU can and cannot do. It already distributes vast sums in favor of poorer regions through cohesion funds. Yet in matters of revenue raising, including debt issuance, it is EU member states which remain fiscally sovereign.
EU debt implies a fiscal sovereignty for which the block is as politically unprepared now as it was ten years ago. The inflated expectations of the euro, global leadership, and other projects now haunt the EU when its means cannot match its ends.
Ian BremmerPresident of Eurasia Group
It definitely should, yes, but the politics in Europe are so broken we won’t see it in our lifetimes.
Martin EhlChief International Editor at Hospodářské Noviny
It is a déjà vu question for veterans of the 2008–2009 financial crisis. Because of what we have witnessed in European politics since then, I would rather answer “yes”—even though the Czech Republic is not a member of the eurozone and stays outside of this debate.
But the Czech economy depends on the eurozone’s economic and political development. Debts from the financial crisis contributed heavily to the rise of populist and nationalist politicians all over Europe. And because the common coronavirus crisis seems to be much deeper, there must be a way for novel thinking.
The new thing is—for example—that Germany will be affected much more than in the last financial crisis. Then, Germany did not have an urgent need to solve the issue on a wider European scale, while now it will impact daily life and wellbeing much more, as we can see for example in the border regions with the Czech Republic. That might create a need or feeling for a wider European solution.
The other very strong argument is political: the EU needs to get much stronger on a global scale to tackle the rise of China and the decline of the United States. Mutualization of debt would be a major step toward a stronger union.
It could also help heal the wounds from the beginning of the coronavirus crisis, when every member state was handling the issue alone and the image of the EU and its basic pillar of solidarity was profoundly damaged.
Ferdinando Nelli FerociPresident of the Istituto Affari Internazionali
According to the most recent International Monetary Fund economic forecasts, the coronavirus will have devastating consequences on the economies of EU member states. But the impact of the pandemic will differ from country to country. What has been defined as a symmetric shock will have asymmetric consequences due to the countries’ different structural situations.
Previous GDP growth, productivity rates, levels of unemployment, and, last but not least, the burden of public debt before the pandemic will make the difference. The very resilience of the eurozone may be affected.
True, the EU has reacted more rapidly and more efficiently this time than on the occasion of the 2008–2009 economic and financial crisis. The suspension of the Stability and Growth Pact, the massive interventions of the ECB, an EU fund to support national unemployment schemes (SURE), a new facility of the European Stability Mechanism, and an enhanced role for the European Investment Bank are proof that important measures have been decided.
But it may not be enough. A decision is also necessary on an EU recovery fund to support national measures of stimulus to the economies of member states. Such a fund should be capable of mobilizing a total of €500 billion. And it should be financed through the issuing of bonds possibly guaranteed by the EU budget.
Solidarity is in the interest of all. And mutual support is an imperative in the present circumstances if we want to avoid another major crisis in the eurozone and a wave of euroskepticism.
Erik JonesProfessor of European Studies and International Political Economy at Johns Hopkins University
The European Union already has common debt issued by the European Investment Bank, the European Stability Mechanism, and the European Commission.
Moreover, each of these institutions has a role to play in financing the response to the current crisis. Those European countries that share the euro have common exposure to much of the balance sheet of the ECB as well. The problem is that these common instruments together are still not enough to carry Europe through the current lockdown all the way to a full recovery.
The issue is whether any shortfall should be done on a piecemeal basis—by each member state government borrowing what it can to finance its own requirements on the markets—or whether Europe’s heads of state or government would draw advantage from pooling their creditworthiness and borrowing requirements in order to get the best possible terms from the markets.
This pooled effort would not relieve national governments of the obligation to repay the finances they use, although some interventions might be shared. But a pooled effort would ensure that every government has access to the resources it requires on terms that are sustainable. That would certainly be better than the alternative.
Pol MorillasDirector of the Barcelona Centre for International Affairs
The short answer is yes. Common debt would be the ultimate and powerful evidence of the willingness of member states to build a joint and long-lasting political union. What defines a shared project better than trusting your neighbor over an adequate use of borrowed money?
Common debt is, however, only one of many pillars of a more solid political union, together with joint fiscal capacity and democratic accountability for resource allocation.
There is some sort of asynchrony over the response to the coronavirus crisis. The North argues that common debt should be the final step of an in-depth EU reform process, preceded by more robust economic and political control mechanisms. The South replies that the humanitarian and economic response to the crisis cannot wait until tomorrow, particularly because no one but the virus is to blame. The coronavirus is an exogenous and (semi)-symmetric shock.
The middle ground can be the Spanish proposal (building on a French one) for an EU recovery fund that reconciles antagonistic positions over coronabonds and gains the support of Germany over grants, not loans.
For the EU today, time is of the essence. While a confined world stops, can we ask Europe for more speed? The process of integration shows that once political discussions such as common debt hit the European public arena, the union moves. Albeit slowly and step by step.
Christian OdendahlChief Economist at the Centre for European Reform
The term “eurobonds” is a distraction. It brings out all the old, eurocrisis-trained reflexes. Nor do eurobonds solve the problem at hand: Italy and Spain do not need common debt as such, they need transfers to master the crisis.
Ideally, a common European response would work via the EU. Based on guarantees by member states, the EU takes on long-term debt to fund a support and recovery program. This program would distribute more money to those regions that are hit hardest. And the debt service and later repayment would be tied to GDP, that is, to how well economies recover. Regions that are hit hard and recover slowly would receive transfers from regions that were not hit as severely and recover quickly.
The common European debt issuance is just the financial plumbing to make that work, but it is not open-ended mutualization of existing debt. The best framing would be an insurance: countries pay a regular, GDP-linked premium to receive payouts during severe crises.
There has never been a better time to implement such a European pandemic insurance. History will judge all European countries harshly if they fail to agree one.
Miguel Otero-IglesiasSenior Analyst at the Elcano Royal Institute
This is a very pertinent question. But let me ask you a counterquestion: Do you know of any monetary union that has survived for a hundred years without a fiscal union? I don’t. So, yes, we definitely need common debt.
If we consider that the European integration project is like a couple and every decade of its existence (more than seventy years) is the equivalent of a year of relationship (hence a bit more than seven years), this is now crunch time.
Indeed, the couple has been married for a couple of years (the euro came twenty years ago), but now they need to decide whether they take on a mortgage to buy a house together. Not an easy decision. Especially because there is a pandemic and the weaker one is struggling while the stronger one doesn’t want to take on debt. But it is in this moment of truth that you need to decide if you want to stick together.
In order to decide, I would advise the weaker member to think hard about a joint plan on how they will be able to repay the debt. If this is the case, the stronger part might say yes.
Daniela SchwarzerDirector of the German Council on Foreign Relations
In the coming months and years, the EU and its member states will need huge budgets to kick-start economic recovery and fund necessary economic transitions with regard to digitization and ecological transition. All this will have to happen in an international environment that is more competitive and rough, while political and social tensions within the EU rise.
There is, hence, no time to lose; if the current disruptions the EU is facing shall only be temporary, EU leaders need to act quickly to avoid lasting damage.
A first task to solve is how to raise—as estimates go—up to €1 trillion to fight the pandemic and its economic consequences. The EU will be best served if it issues joint bonds, ideally perpetual bonds, that the EU guarantees together so that money can be raised in the markets at low cost. This does not entail a mutualization of national debt.
This fresh money can either go to a specific recovery fund that serves to hand out grants and loans or to reinforce the financing capacity for the next multiannual financial framework.
Whichever way money is paid out, it is key that the EU insists basic principles such as the rule of law and democracy are respected by the recipients.
Shahin ValléeSenior Fellow at the German Council on Foreign Relations
The cost of this crisis will prove to be the biggest economic shock in a century and, given our levels of debt, it will be a testing moment for European economies and for European politics.
The consequence is that this crisis could further accelerate economic divergence between European countries. This is particularly important in the euro area where it could again fuel economic divergence that would threaten the integrity and sustainability of the single currency.
So far, the ECB has undertaken to buy large amounts of European government debts and de facto played the role of mutualizing the fiscal response that European governments have shunned.
But this is not a sustainable response. Indeed, the central bank cannot effectively mutualize and monetize the costs of this crisis without political endorsement. Governments must allow a level of fiscal mutualization, which will enable the ECB to underwrite parts of the costs of this crisis.
Whether we collectively allow this to take place over the next few months will to a large extent determine the shape of the European economy and European politics for the next generation.
In the absence of mutualization and monetization, Europeans will agonize between the Charybdis of austerity and consolidation and the Scylla of debt restructuring that could simply destroy the single currency and the European Union.
