- The coronavirus pandemic has revived the acrimonious debate between euro zone countries about jointly issuing debt to meet healthcare needs and address the deep economic downturn that is set to follow.
- Nine of the 19 countries that use the single currency called on March 25 for a common debt instrument issued by a European institution to fight the outbreak and its effects.
- The idea of such debt, called “coronabonds”, was rejected by Germany, the Netherlands, Finland and Austria, fiscally “frugal” northern states wary of pooling liabilities with what they see as more spendthrift countries in southern Europe.
- The idea of joint debt issuance was previously raised by Italy, during the 2009 global financial crisis, and by France and Italy in 2012, at the peak of the euro zone’s sovereign debt crisis, and dismissed by Berlin and its allies. But ideas are likely to evolve and deepen as the current crisis prompts more discussion.
Outlined below are various options for mutualisation, from what exists now to the most ambitious proposals.
Existing possibility of Euro Zone jointly issued debt
- The euro zone jointly issues debt through its bailout fund, the European Stability Mechanism, which borrows on the market against the security of its paid-in and callable capital provided by euro zone governments.
- The fund, together with its predecessor EFSF, issued such debt to bail out Greece, Ireland, Portugal, Cyprus and Spain during the sovereign debt crisis. It can and probably will now offer standby credit lines, called ECCL, of up to 2% of a country’s gross domestic product or 240 billion euros in total, to all euro zone countries.
Existing possibility of European Union jointly issued debt
- The European Commission issued debt through the European Financial Stability Mechanism (EFSM) to help fund the bailouts of Greece, Ireland and Portugal and give balance of payments help to Latvia, Hungary and Romania.
- EFSM debt is backed by all 27 European Union countries through the bloc’s joint long-term budget.
- It can, and probably will, issue 100 billion euros of debt backed by 25 billion euros of guarantees from member states, to finance wage subsidies in all EU countries as part of a short-time work scheme modelled on the German “Kurzarbeit” plan.
Existing European Investment Bank (EIB) borrowing
- The EIB, the investment arm of the EU, is owned by EU governments and issues around 60 billion euros of debt every year to lend for various projects in the bloc.