Germany and the Netherlands, two of the staunchest opponents of the idea of issuing common debt in the eurozone, would be open to discuss new eurobonds to mitigate the economic impact of the coronavirus COVID-19.
The coronavirus has created an unprecedented crisis in Europe, with schools and businesses closed across the bloc, and citizens in half a dozen countries told to remain at home.
Following a teleconference on Tuesday (17 March), EU leaders pledged to do “whatever it takes”, as the European Council president, Charles Michel said, echoing European Central Bank’s Mario Draghi during the eurozone crisis in 2012.
But despite the sound commitment, the response continues to be mostly national and too small for the damage caused by the pandemic.
EU leaders from the most affected countries have called for the mutualisation of debt issuance to finance a coordinated fiscal stimulus These temporary eurobonds, or ‘coronabonds’, could be acceptable to the Netherlands.
The Hague has always been against any fiscal transfer and the mutualisation of risks among European partners. In this case, the country could be “open to that discussion”, although there are other instruments and options that should be considered before, according to an EU diplomat.
The Dutch government, however, wants to fully exploit the flexibility of the Stability and Growth Pact and the state aid rules, to make the most of the national expenditure. After that, it should be explored what additional tools could be used from the European Investment Bank and the ECB.
“Lets look at other options first, before looking into most difficult one,” the EU diplomat added in a reference to the ‘coronabonds’.
The same source said it would be premature to jump into this debate at this stage, but admitted that the discussion could come within “the next couple of weeks”, as part of the coordinated fiscal stimulus EU finance ministers are exploring, as well as the role the European Stability Mechanism could play in it.
The idea of the ‘coronabonds’ was raised by Italian Prime Minister Giuseppe Conte during the EU leaders’ teleconference on Tuesday.
According to Bloomberg, German Chancellor Angela Merkel didn’t veto it and was ready to let her finance minister, Olaf Scholz, engage in the discussion.
She later told reporters that she would “talk to Olaf Scholz so that Germany continues to take part (in the discussions). But there are no results regarding this.”
The unprecedented crisis posed by the coronavirus softened Germany’s outright opposition to the joint issuance of debt, at least for the current context.
Merkel had not shown this openness even during the worst period of the eurozone crisis in the summer of 2012. At that time, she said that “I don’t see total debt liability as long as I live.”
During Tuesday’s teleconference, France also supported Italy’s request. For French President Emmanuel Macron, the European Investment Bank should be the issuer, and the ESM could play a role by extending guarantees, according to Bloomberg.
No moral hazard
The arguments used in the past by the critics of the eurobonds hardly stand under the current circumstances, as they would not trigger any risk of moral hazard, given that the additional financing would not cover reckless spending but would be dedicated to tackling an external shock beyond the control of national governments, and affecting the bloc as a whole.
EU diplomats are aware of the exceptional situation, and the need to show “solidarity” with Italy, the worst-hit country apart from China.
Beyond these extraordinary circumstances, the opposition in principle to the issuance of eurobonds by a few capitals like Berlin or The Hague still remains, the EU diplomat said.
The proposal would have a complicated path ahead. Any changes to the ESM Treaty would be very difficult to get approved. The reforms made over the past months still need to be formally endorsed.
Still, the eurozone’s bailout fund is seen as the most powerful ‘bazooka’ not only to fuel the recovery but also to calm investors, as stocks are in free fall and turbulences are back in the debt market.
The ESM has €410 billion available (around 3.4% of the eurozone’s GDP).
Instead of relying on joint debt issuance, an alternative could be in the hands of the ECB, by playing a bigger role in buying national debt in the secondary market, said Maria Demertzis, deputy director at Bruegel think tank.
“Fiscal authorities could issue debt and the ECB would buy the same amount in the secondary market to act as a stabiliser”, she told EURACTIV.com.
In her view, if national governments move in the right direction, “the ECB will follow”.
However, some members of the ECB are not very happy with that role.
The Austrian central banker, Robert Holzmann, said it is up to the national governments to provide the fiscal stimulus. “Monetary policy cannot cover up the problem,” he told Austria’s Der Standard newspaper.
The ECB issued a statement to insist that the institution was ready to adjust its measures “to ensure the smooth transmission of its monetary policy in all jurisdictions”, which signals its willingness to intervene in the debt markets.
The issue of the ‘coronabonds’ is expected to be discussed in the next few days, as finance ministers may provide some input for the EU leaders teleconference next week on what additional financial and fiscal tools could be deployed against the fallout of the virus, in particular by involving the ESM.
Following the Eurogroup teleconference last Monday, ESM managing director, Klaus Regling recalled that the ESM has some instruments that have never been issued.
“We will think, and we could do that with the Commission, whether and how these facilities could be useful under current circumstances. And the circumstances are very different from 10 years ago.”
In the European Parliament, a majority of the political groups are calling on the ESM to expand its arsenal.
They called on member states “to take further bold actions, including the possibility of setting up a dedicated instrument within the ESM and with specific rules for providing additional funding to member states severely hit by the outbreak of the COVID-19,” said the coordinators of a majority of the political groups in the Economic Affairs Committee.
[Edited by Zoran Radosavljevic]