Coronabonds offer the wrong path
Frank Schäffler // 16 April 2020
The German newspaper ‘Süddeutsche Zeitung’ published an open letter by well-known artists about an initiative to issue Coronabonds in order to share the burden of the pandemic across the EU. The letter proclaimed: “In the interest of the European Union – and Germany – we have to act together and prove maximum economic solidarity towards one another. We have to utilise all means available to create stability for all. The current situation demands concrete and immediate solidarity, in other words the issue of Coronabonds by all eurozone member states.”
Coronabonds are not new to political debates in Germany. During the eurozone crisis, the same people were calling for eurozone bonds with shared liability between countries. Now the idea received a new name, but the aim is exactly the same: to collectivise the additional debt burden. It is certainly true that Italy and other European countries with an already existing indebtedness problem are bearing the heaviest burden of the Corona pandemic as well. Nevertheless, all eurozone members are able to continue refinancing their debt on the financial markets at the moment. This is the result of ECB interventions, not necessarily their own merits. The ECB has substantially expanded its bond-buying programme, thereby enabling Italy to cheaply refinance its debt. The spread between yield of German and Italian ten-year government bonds is smaller than it was during the 2018-19 coalition years of the Five Star Movement and Lega.
The same applies to other eurozone countries, too. In 2008 the average eurozone interest on government bonds was 4,59%, whereas in 2018 it was only 2,11%. Italy does not seem to have a shortage of money, as the government recently decided to renationalise the failing airline Alitalia for 500 million euros. Despite the issues with the European Stability Mechanism (ESM), it provides a useful framework to back the single currency with national liabilities, in case the euro itself would be endangered. Although the Corona pandemic cannot be blamed on any member state, the principles of the ESM framework could be applied in this instance as well: to supply money in exchange for viable economic plans. It would be even better if countries were only able to use this shared pot of money if they were willing to accept certain changes to their spending commitments.
Coronabonds would effectively replace the ESM and they would be expanded to EU countries that have not adapted the single currency. The European Commission clearly prefers this option, as it always wished to transfer the intergovernmental framework of the ESM into EU legislation to further expand its sphere of influence. The Commission used every single crisis to further this goal, but that does not have anything to do with solidarity. Corona or Eurobonds are exactly the opposite of solidarity. They are a collectivisation of public debt by EU member states. Solidarity means the voluntary action of people motivated by compassion and charity. People expressing solidarity do not require anything in return, besides a thank you.
So what can the EU do to help its member states? Firstly, it should utilise all instruments and financial resources available through the legislation for natural catastrophes and extraordinary events. The financial resources for mitigating these events are already included in the EU budget. Second, it must protect the European Single Market with a much stronger voice. The economic fallout resulting from the pandemic is best mitigated with the free flow of goods across borders resuming as soon as possible. Intra-European border controls are poisoning the economic recovery of the EU. Therefore, the European Commission must do everything to restore cross-border trade without any delay. Third, what applies to intra-European trade within the Single Market, also applies to our global trade with third countries. The EU must become a pioneer of trade liberalisation and set an example to the rest of the world. It must demolish its own protectionist tariff and non-tariff trade barriers first. If it cannot do it based on bilateral agreements, the it needs to follow a unilateral liberalisation process. The Great Recession of 1929 lasted especially long because industrialised nations – led by the United States – decided to adapt protectionist measures and seal themselves off from the rest of the word. We should avoid making the same mistake again.
EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).
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