Nine countries, including France, want to introduce “corona bonds”, which are instruments for raising funds on behalf of the entire euro area to fight against the Covid-19. But several countries, including Germany, are opposed to the risk of giving the impression of a lack of European solidarity in the face of an unprecedented crisis.
European budgetary solidarity has its limits. Even in this time of the Covid-19 pandemic. The 19 countries of the euro zone failed, Friday, March 27, to agree on the establishment of “corona bonds”, a common mechanism to support the financial effort of the countries in the fight against the new coronavirus. A failure that recalls the darkest hours of the eurozone crisis in the early 2010s.
The idea of ”corona bonds” was first put on the table by Christine Lagarde, the director of the European Central Bank (ECB), at the beginning of last week. These are obligations that would allow euro area member states to raise money on the cheap. Indeed, interest, instead of being indexed to the financial health of the borrowing country, would be linked to that of the euro area as a whole. It would be a kind of large mutual loan in order to create a common pot in which the States could draw according to their needs.
New Club vs. Germany
It is the budgetary solidarity mechanism par excellence: Italy and Spain, two countries particularly affected by the Covid-19 epidemic and with fragile finances, would, for example, find it difficult to find money on markets without paying a high risk premium using traditional government bonds. But thanks to the “corona bonds”, they could benefit from more advantageous interest rates, indexed to the financial health of the entire eurozone, which includes countries with a better budget like Germany and the countries of Northern Europe .
No wonder this concept quickly won over countries with the most empty boxes. A coalition of nine countries, led by France and supported by the ECB, tried to have these “corona bonds” accepted by Brussels on Tuesday and Thursday last. But, twice, Germany and the countries of northern Europe replied “nein”.
A refusal which “outraged” the Italian Prime Minister, Guiseppe Conte, and his Spanish counterpart, Pedro Sanchez, reports the American chain CNN. German intransigence has reopened old wounds dating back to the eurozone crisis. The “corona bonds” have, in fact, a model which had also come up against the Berlin obstacle in the early 2010s: the eurobonds. At the time, it was a question of allowing Greece, in quasi-bankruptcy, to raise money by issuing European debt. “The idea was that Greece, then Spain or Italy, could issue eurobonds, and that part of this loan involved all the eurozone states [qui devaient rembourser en cas de défaut de paiement, NDLR]”, reminds Christophe Blot, specialist of the European economy at the French Observatory of economic conjunctures (OFCE), contacted by France 24. A mutualisation of the debt which the German government did not want to hear, arguing that it does not there was no reason for Germany to pay for Athens’ fiscal mismanagement.
“Corona bonds”, eurobonds, same fight?
But this time it’s different, say the promoters of “corona bonds”. “They believe that we are facing a specific crisis which affects all European countries in much the same way, which would justify the creation of a common asset which could be used, for example, to finance research or support the nursing staff “, explains Christophe Blot. The letter addressed to Brussels to defend this initiative by the nine countries which are favorable to it, specifies this idea: “The argument in favor of a common instrument is strong, because we are facing a symmetrical external shock, which is not of the responsibility of any country in particular, but whose negative consequences are felt by all “.
Why does Germany, which nevertheless accepted that the sacrosanct golden European budgetary rule (prohibition to exceed a deficit higher than 3% of the GDP) be flouted in the name of the fight against Covid-19, refuses- her to make that extra gesture? German Chancellor Angela Merkel has expressed her preference for existing financial tools such as the European Stability Mechanism (ESM). This emergency fund had been set up at the end of the eurozone crisis to allow countries in financial difficulty to have quick access to liquidity.
He still has 410 billion euros that could be quickly mobilized to deal with the pandemic. The implementation of “corona bonds” would take more time because, like any new instrument, it would first have to define the contours.
But the idea of using MES is repugnant to countries like Spain or Italy, because the borrower can be forced to undergo structural reforms in order to put his finances in order in return for the advance of funds.
More federalism
Germany and the countries of northern Europe also fear that “corona bonds” will change the very nature of the euro zone. “From the moment we talk about pooling the debt, we enter a more federalist perspective of the euro zone, which would have profound consequences on the functioning of the institutions,” explains Christophe Blot.
In fact, countries could hardly use the funds obtained through the issuance of “corona bonds” without the other eurozone states, which would be required to reimburse in the event of default, having oversight over the how the money is spent. In other words, the implementation of “corona bonds” would tip the euro zone into a new dimension where the fiscal policy of a country would be a little more everyone’s business. “We criticize Germany a lot for its lack of solidarity in this affair, but we also have to wonder which country would like Berlin to become a sort of arbiter of its budgetary choices”, underlines Christophe Blot.
And Germany also does not want to take on this role of European budgetary super-cop which would probably fall to it in the event of creation of “corona bonds”, since, by its economic weight, it would be de facto the most important contributor to this joint loan.
The health crisis has therefore created a new fracture within the euro zone which has been somewhat hastily summed up as a question of solidarity. In reality, the demarcation is rather made between countries, like France, which want to act quickly and strongly, even if it means thinking about the consequences afterwards, and those which, Germany in mind, warn that certain decisions, like “corona bonds”, risk causing far-reaching institutional and political change. In the meantime, in the absence of an agreement, the eurozone has given itself two weeks to reflect on the response to the crisis. A delay that risks leaving traces in the face of a virus that spreads at high speed.
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