The age of the pandemic has brought with it its own viral lexicon. We’ve organically adopted words and phrases we’d previously never uttered: social distancing, N95s, and flattening the curve. Now, there is a new entry for the COVIDictionary: “coronabonds.”
It’s a term whose use has accelerated in Europe, where the 19 countries of the eurozone—the nations that share the Euro currency—are caught in gridlock as they decide how to lessen the blow of the emerging economic fallout. One of the proposed measures is the “coronabond,” or a shared debt instrument that allows all the eurozone states to essentially combine debt, flood the money jointly to the countries most in need, and share the risk. In the short term, it’s a way in which to generate new funding to help stabilize the continent during a recession—which France officially entered Wednesday.
The coronavirus has dealt particularly devastating fates to Italy and Spain, and those nations, known colloquially as the two major “southern European” states, have long had economies inferior to those of the “northern” nations, represented primarily by Germany. With the fallout expected to batter those southern nations—both of whose economies are expected to shrink by 15%—hardest, the question for the richer, more economically conservative states becomes how to best help.
A “Eurogroup” meeting between the zone’s finance ministers Tuesday—a video call, of course—went on throughout the night for 16 fruitless hours. So, it was perhaps surprising that at the next meeting, on Thursday, the ministers swiftly reached an agreement on an economic rescue deal. It consists of €540 billion ($590 billion) in total relief funds, composed of: an employment insurance fund of €100 billion ($109 billion), loans of €200 billion ($218 billion) to support EU businesses, and a €240 billion ($262 billion) bailout chunk solely for healthcare, from the European Stability Mechanism (ESM), a rescue fund created during the European debt crisis in 2012 specifically to relieve flailing members.
“Today, we agreed upon three safety nets and a plan for the recovery, to ensure we grow together, not apart, once the virus is behind us,” said the Eurogroup president, Mário Centeno, in a video statement following the agreement. “These proposals build on our collective financial strength and European solidarity.”
Notably absent from the plan was coronabonds, which Italy in particular views as its lifeline. The proposal is not officially off the table, and could be part of a “recovery fund” to follow. This appended fund, which could contain further financial measures, may be a subject of discussion during a follow-up meeting on April 23, and Italy’s finance minister, Roberto Gualtieri, firmly announced he’d be once again pushing for the debt-pooling proposal.
Messi sul tavolo i bond europei, tolte dal tavolo le condizionalita del #Mes. Consegniamo al Consiglio europeo una proposta ambiziosa.
Ci batteremo per realizzarla. #Eurogroup #eurogruppo pic.twitter.com/RTtkIOQXlO
— Roberto Gualtieri (@gualtierieurope) April 9, 2020
Coronabonds versus traditional measures
“The response to coronavirus will require the governments to spend money,” says David Adler, a policy leader fellow at the School of Transnational Governance in Florence, and the policy coordinator of the Democracy in Europe Movement, a pan-European movement that aims to seek a more democratic Europe. “The question becomes, how do they spend that money, and for whom?” For Adler, coronabonds are the best way of “planning for economic recovery that’s not going to bankrupt individual members of the eurozone.”
Nine European nations have expressed support of the idea: Italy and Spain, plus France, Belgium, Luxembourg, Portugal, Greece, Cyprus, Ireland, and Slovenia, with others reportedly mulling over joining forces. The original proposition from the “eurozone 9” is vague; they call for bonds backed by a nameless central institution, and do not specify a figure or maturity length. Adler’s organization suggests €1 trillion ($1.09 trillion) in bonds, with a long maturity of 30 years or so, backed by the European Central Bank (ECB), the authority for monetary policy for the eurozone countries.
Even pre-COVID-19, the idea of the “eurobond” has kicked around for a long time among proponents of a more federalist Europe, as a way of creating debt that would generate what was essentially a federal budget for Europe. While it hasn’t gained much support before now, the coronavirus crisis, and the recoining to “coronabond,” has elevated the idea. It’s now backed even by many German economists, some conservative. And 64.1% the German public polled wanted its leaders to give up its resistance to joint-European borrowing.
As Thursday’s agreement showed, coronabonds are hardly the only option of getting money flowing. Individual countries are already fending for themselves by borrowing money and increasing spending—but doing that on its own, in turn, causes sovereign debt to surge. That naturally leads to severe austerity measures: in many cases, cuts to social services, pensions, and minimum wages—”the same cuts that have put that have made those countries far too precarious in the face of the coronavirus,” Adler says. That creates a vicious circle of boom-bust-bailout.
The ESM bailout measure, one of the elements of Thursday’s plan, roughly mirrors what happened after the European debt crisis, when the member states aligned in a similar pattern as they’re in now. The ESM creates bonds that are lent to governments with expectation of repayment. This method is how a tremendously struggling Greece was bailed out starting in 2015. But, it came with an immense toll on government spending, with a torrent of austerity measures imposed to level out the debt. By 2017, Greek unemployment was still at 22%, and a third of the population lived below the poverty line. In 2018, outstanding repayments to the ESM alone totaled €168 trillion ($183 trillion).
The Italian prime minister, Giuseppe Conte, has expressed skepticism of this approach, because of the burden of repayment that rests solely on one state, rather than a joint approach by Europe. “The ESM is a tool created to help single member states that face financial problems caused by asymmetric shocks,” Conte said in an interview with Italian business newspaper Il Sole 24 Ore, on March 28. Adler adds: “Just when the Italian government would need the money most is when the markets would punish the Italian government.” Conte pushed for the coronabond approach: “If Europe does not prove to be up to this historic challenge,” he said, “the whole European building risks losing its raison d’etre.”
The battle to be the European savior
The more spendthrift northern states—Germany, along with the Netherlands, Austria, and Finland, which Adler calls the “frugal four”—have all vetoed the proposal from the very start, and appear unlikely to change their minds as negotiations continue. Their viewpoint is that they’ve saved for a rainy day, and that it’s not their duty to bolster the member states that haven’t. Adler lends an example: “Why should a Dutch bus driver, who has scrimped and saved to retire at 67, have to subsidize a French bus driver who has been pampered by the welfare state of France and who will retire at 52?” There’s also evidence those nations are nervous of rocking their own brittle coalition governments and stoking already present populist anger.
Germany and its northern allies’ continued refusal may signal an ultimate no-go on coronabonds. But it’s France’s position in the north-south spat that is perhaps the most notable. The nation has actively pursued coronabonds, offering its own plan of jointly issued debt of 3% of the EU’s GDP (which would equal almost €500 billion ($546 billion), with a 10-year maturity. It’s a measure that France may increasingly need, now that it’s officially entered a recession. But, long term, standing in solidarity with Italy and Spain could be a way to emerge as an alternative commanding power to the “German stronghold on eurozone politics,” Adler says. France’s finance minister, Bruno Le Maire, seemed to indicate that he’d continue to push for eurobonds in a tweet he sent after the deal was reached. He praised the agreement, but also held out hope for “a stimulus fund to come.”
During 2008-2012, when France called for eurobonds during the debt crisis, German pushback was slightly more understandable. Now, with a deadly pandemic that has already cost 50,000 lives within the European Union, the dissent may be harder to swallow. “Paris is now positioning itself as a mediator in this dispute,” say the authors of a Tuesday piece by the European Council on Foreign Relations. Euroskepticism—shaky sentiments toward the European Union, which led to Brexit—has long been festering in Italy, and this is likely to rattle it further and push power into the lap of the anti-Europe opposition party. There’s also the chance that populism in the Netherlands, which positioned itself to the right of Germany on the bailout structure, could flare up for its somewhat conceding to its neighbors. “The COVID-19 crisis will be a make-or-break moment for the EU,” the authors write.
In the short term, though, Adler says, there’s no question that funds are up for grabs for the fragile states, but it’s a case of borrowing securely. “You can get your hands on money any way you want,” he says. “The question is: Are you getting it from a loan shark? Or, are you getting it from reliable source that’s not going to break your kneecaps when you try to pay the money back?”