A taxonomy of Eurobonds

The European response to the coronavirus crisis is focused on the supply of liquidity available to countries. The proposal of the Commission to co-finance unemployment insurance, European Investment Bank (EIB) guarantees, the precautionary lines of the European Stability Mechanism (ESM) and, of course, the purchase of public debt by the European Central Bank (ECB) are all necessary instruments albeit restricted to credit supply.

However, when the health crisis subsides, fiscal deficits will have reached a double-digit ratio as a percentage of GDP and public debt may have increased by more than 20 percentage points. At that stage, a renewed fiscal impetus would be necessary, although some countries will not be able to face the risk of relapsing into yet another sovereign debt crisis. Therefore, a common reconstruction programme will be imperative.

This reality necessarily leads us to the debate over the ‘Eurobonds’. However, there are distinct models to be considered, which impedes a true negotiation.

A first type of ‘Eurobond’ is based on the collective issuance of a debt security, where each country assumes the management of its tranche while having shared liability for the rest. This model prevents national parliaments from supervising the tranche of the collective issuance carried out by third countries. For example, the Parliament of Finland, a country whose economy represents 1.8% of the Eurozone GDP, would assume a contingent liability of 98.2% of any collective issuance and could claim “no mutualisation without representation”. This obstacle could be minimised through conditionality. But this road brings us back to the “Troika”. Thus, these “intergovernmental” Eurobonds sow the seeds of discord and poison public opinion in all countries, while continuing to increase national debt despite their low interest rates.

A second option would entail the issuance of European Union debt by the Commission, controlled by the European Parliament and Council. These “Eurobonds” have all of the democratic credentials and are already in circulation, issued through the European Financial Stabilisation Mechanism, even though previously the financing was provided in the form of loans to the countries. In this case, however, it should be the Commission that manages the obtained resources, expanding the investment capacity of the Multiannual Financial Framework or through an ad hoc reconstruction instrument.

Both possibilities require EU resources to be increased, enhancing EU participation in shared taxes or extracting the sources of tax avoidance and evasion through the Commission proposals to harmonise corporate taxes and create digital taxes. This support could be rooted as well in national governments, with greater contributions or guarantees, or even in the ESM.

In fact, the ESM issues a type of debt similar to the “intergovernmental” Eurobonds, which provide loans to countries with conditionality and a liability limited to the capital of the institution. The ESM could still be useful in anchoring this common reconstruction programme managed by the Commission, through the issuance of “Coronabonds”.

We should thus clarify the exact meaning of “Eurobonds” and come to an agreement on which model would be ideal. Obviously, this would be the European Union debt. Then, we can proceed to negotiate the level of solidarity necessary. This is vital.

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