From the moment the first coronavirus cases where reported in the Chinese city of Wuhan, many realized that its impact on the world’s economy would be astronomical. Some warned their respective countries – few warnings were heeded, but they were proven right by the rapid and uncontrolled expansion of the virus worldwide. Most states were forced to implement at least partial restrictions on their populations, with a great percentage of business activities ceasing for extended periods of time. Even where commerce managed to remain active, the fear the pandemic instilled in consumers and investors has left a profound and worrying mark. As of July 2020, the virus is still active, with a second wave expected soon. Consequently, countries in the European Union race to secure funds in order to finance healthcare and other vital government services. The closing of many businesses and heightened levels of unemployment discourage the raising of taxes, and the single currency agreements between Eurozone states put monetary policies such as quantitative easing beyond the decision sphere of most member states. Thus, as desperate nations seek innovative alternatives, the Eurobond re-emerges as a beacon of unified financing.
The Eurobonds proposal is not new. In 2011, amidst the ongoing worldwide financial debacle and looming sovereign debt crisis, the European Commission (EC), led at the time by Mr. Juan Manual Barroso, proposed for the first time the issuing of joint debt, or Eurobonds.
Before delving deeper into the implications of the Eurobond, a brief description of what national, or government, bonds are would be beneficial. In the most basic terms, government bonds are financial instruments issued by governments in order to raise funds. Most then trade in secondary markets and are highly liquid. At purchase, the buyer pays a price which entitles them to receiving the face value of the bond at maturity. Certain types of bonds also pay interest to the holder, the level of which is linked to the duration of the bond and the default risk of the issuing nation. Given that governments have lower percentages of default than companies, investors seeking safe, stable investments tend to prefer these products to stocks or company paper. As can be deduced from the effects of yields, financially stable countries with strong historic performances are afforded lower yields, making it easier for them to finance themselves through these means. On the other hand, countries with higher default risk and weaker economic capacities are faced with punitive yield levels, making the issuing of debt a costly affair. Perversely, higher yields perpetuate cycles of poverty and economic instability, as less solvent nations are forced to expend vital resources paying back the interest on their bonds.
To mitigate this, the 2011 EC proposed a joint issuing of debt for all 17 eurozone countries. For struggling countries such as Greece, Italy and Ireland, this would have allowed them to benefit from the strong credit rating of their northern neighbors to acquire funds at lower costs. Inevitably, it would have eased the effects of the economic crisis upon their ability to offer government services, making necessary austerity measures less dramatically punishing for the population. In times of oronavirus, a similar effect would benefit states struggling to contain the pandemic, while also opening the door to viable possible future efforts to kickstart the economy. Moreover, the implementation of this measure in 2011 would have fortified the Eurozone financial system against future turmoil, such as the coronavirus crisis. Finally, strong debt financing assets on par, stability and volume wise, with US treasury bills would have solidified the position of the euro currency as a worldwide reserve currency. Although various different versions of the Eurobonds were put forth, all revolve around the unification of debt instruments under a Eurozone mandate. Naturally, southern European countries enthusiastically defended the proposal, while central and northern nations where, and still are, staunchly opposed. In particular, German and Dutch officials worry that Eurobonds would have higher yields than their own national instruments, making their use more financially taxing, and thus inefficient. Furthermore, many economists point to Eurobonds as ripe for the burgeoning of moral hazard and free-riding issues, potentially inflating the yields of Eurozone bonds across the board.
In all fairness, northern Europeans are not without reason for their skepticism. During the successive economic crisis of the early 2010s, many aids and loosening of standards where granted to struggling countries in an effort to save their economies and the young euro currency. Many voters are now perplexed and angered at how these efforts were seemingly useless, as southern states made no concerted efforts to strengthen their financial structures, while utterly failing to control the pandemic even as the EU’s own institutions urged them to do more. Clearly, this paints Eurobonds as a surefire path to more fiscal irresponsibility by their main beneficiaries. Moreover, at a more ideological level, the fact that the Spanish government, one of the main proponents of the measure, is partially composed of hardline anti-EU communists that have repeatedly presented the economically disastrous and authoritarian Venezuelan regime as an example to heed is sure make many moderate EU leaders and their voters ponder what the true intentions behind the Eurobonds are.
Thus, the issue of Eurobonds goes beyond just the realm of practicality and deep into that of the EU’s own identity. As Italian prime minister Giuseppe Conte stated: “What do we want to do in Europe? Does each member state want to go its own way?” His question has no monolithic answer. Ultimately, each member state must ask itself whether temporal hardships are an acceptable cost to preserve the tenants of solidarity and cooperation upon which the European Union was built.
“If we are a union, now is the time to prove it” – Giuseppe Conte.