Eurobonds, but different

Unprecedented measures

The European Central Bank assumes that the economic boom of the pandemic will be much bigger than the downturn after the 2008 credit crisis. To deal with this blow, the Pandemic Emergency Purchase Programme (PEPP) was launched, a new bond purchase programme worth 750 billion euros. The ECB will meet again next Thursday and will decide whether this is enough or whether more will be needed. Meanwhile, the European Union (“EU”) is not standing still either. For example, the EU member states decided earlier on stimulus measures of 540 billion euros. The proposed multi-annual budget of the EU will be adjusted in view of the crisis, amounting to a further EUR 1100 billion. On top of this, Merkel and Macron recently jointly proposed to launch an emergency fund of €500 billion. An amount on top of which the European Commission wants to add another 250 billion. That amounts to a total of just under 2400 billion euros. Clearly, the outbreak of the coronavirus has made the minds ripe for unprecedented measures.

Turn of Merkel

The Franco-German proposal for a recovery plan of 500 billion, supplemented by the European Commission to 750 billion, is causing a particular commotion. With this plan, Germany is making a startling 180-degree turn. For a long time, there was disagreement in the EU as to whether this extensive support should take the form of loans or donations. The main victims of the pandemic are the southern Member States such as Italy, Spain and Portugal. The lenders are mainly the more wealthy north: The Netherlands, Germany and the Nordic countries. Until recently, Germany was in the thrifty camp: any form of aid would have to be repaid sooner or later. There could be no question of donations. So Chancellor Merkel made a remarkable turn with the recent proposal. However, the remaining “miserable four”, the Netherlands, Austria, Sweden and Denmark have not yet given up the struggle.

Debt change

Eurobonds issue joint bonds guaranteed by the Member States. Debt is actually mutualised. Given the considerable differences in financial soundness, this would in practice amount to a large-scale transfer of funds from north to south, from rich to poor. It is not surprising that precisely those countries that have made substantial cuts since the previous crisis in order to restore some order to their public budgets are vehemently opposed to this. It is also not surprising that precisely those countries where such austerity measures have been largely omitted now lack the scope to provide state aid. Hence the appeal to the EU’s richly stocked greenhouses.

No Eurobonds

Italy and Spain are thus strongly in favour of Eurobonds. The “miserable four” and Germany do not. The term Eurobonds is therefore anxiously avoided in Merkel’s and Macron’s joint plan. It would offend the thrifty German voter — who is not a great advocate of all sorts of European antics that affect his savings anyway — against it. No, wherewith Eurobonds the member states guarantee repayment, with this new plan it will be Brussels. In fact, the EU budget is being used as a kind of lever. The blame will lie with the European Commission. According to Merkel, this construction remains within the existing EU treaties.

The reddest of every conceivable red line

However, the resistance of the “miserable four” to this joint guilt remains. It is nothing more than the red-most of every conceivable red line that must never be crossed. After all, in the end, there is a transfer from the rich north to the poor south. The thrifty countries are now being called to account for their lack of solidarity and humanity. Countries like Italy and Spain openly question whether membership of the EU still makes sense in this way. Now the absence of the most thrifty of all, the United Kingdom, is avenging itself. Behind the broad British back, smaller countries like the Netherlands could invariably hide behind their identical frugal views, without being called to account.

Eurobonds that may not be called Eurobonds

Eventually the north and south will find each other. For example, the thrifty will agree to some form of support in the form of donations to the severely affected south. But on predetermined conditions. On the other hand, the creation of Eurobonds for a number of countries in the EU is still a step too far. It would do too much harm to the euro-critical voters in the northern countries. Using the crisis to push Eurobonds through could eventually cause the EU to burst.

An outcome though

Eurobonds would also be a solution for the creation of a large European capital market. It would finally enable the EU — after all, the world’s largest economy by size — to compete seriously with those damned Americans. After all, the size of their capital market constantly enables the Americans to go deeper and deeper into debt and pay the bill to the rest of the world. In China and Russia, they hear the authorities grunting about it, in the EU they seem to be less concerned about it. The fact remains that part of public opinion in the EU is not yet ready for Eurobonds. Pressing these bonds through with force would inevitably lead to chunks. So detours are constantly being made in the EU in order to achieve the same goal. For example, the ECB buys unlimited bonds without a fixed key and Merkel and Macron launch “Eurobonds”, which are not allowed to be called Eurobonds. To be continued.

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