Europe is fighting a war, it is clear. No doubt that the priority must be people’s health. However, we cannot ignore that our economies are suffering and that something extraordinary is needed in order to avoid an – otherwise inevitable – depression. Mario Draghi declared in the Financial Times: “The challenge we face is how to act with sufficient strength and speed to prevent the recession from morphing into a prolonged depression […] It is already clear that the answer must involve a significant increase in public debt. […] Much higher public debt levels will become a permanent feature of our economies and will be accompanied by private debt cancellation.”
It is sure that the European budgetary rules will be temporarily eased; in fact, the European Commission has already declared that the Stability Pact has been suspended. So, the challenge is not about allowing member states to run larger deficits but, instead, finding someone who wants to buy this debt at a reasonable interest. Many European countries already have a high debt ratio and piling up more debt would definitely mean increasing their credit risk. Any investor would require high interest to buy these bonds. Therefore, any financial instrument that protects the members from speculation is welcome.
In this sense many ideas are being discussed, such as a European Stability Mechanism (ESM) intervention, the use of Outright Monetary Transactions (OMTs) – Draghi, just by mentioning them in 2012, reassured the investors and cooled the markets down – and, finally, the creation of eurobonds (or coronabonds). Let us explain what they are.
The European Stability Mechanism was set up in 2012 in order to provide financial assistance to the eurozone countries. Among other measures, members might use the Enhanced Conditions Credit Lines. The problem is that normally countries need to undergo an evaluation by the European authorities before taking advantage of the ESM measures. The authorities check the debt sustainability and, if the result is negative, the country that has asked for help has to restructure its debt and follow strict fiscal rules. The authorities, indeed, want to ensure the debt will be repaid. Greece happened to go through such a process and – putting it gently – it did not have a great time. Since the memory is still fresh, no one wants to live through what Greece underwent. For this reason, many members are asking for a change in the ESM procedure, but the Nordic countries (who have their accounts in order) are opposing it.
The Outright Monetary Transactions would be another option. They consist in the purchasing, by the European Central Bank (ECB), of national bonds whose prices are steeply decreasing due to speculations (this means that the interests paid on these bonds become higher and higher). Normally, European countries can benefit from the OMTs only if they have previously been through the European Stability Mechanism, but – as already said – this would effectively mean giving up on their fiscal sovereignty for a while. So, countries would only take this measure into consideration if it took the form of “special OMTs” whose inflows could be spent only on coronavirus matters and that, at the same time, would not require any previous check by authorities.
The eurobonds, instead, would be obligations issued by one (still undefined) European institution and would be used – at least for now – to finance coronavirus-related expenses. Each member could ask for these funds and the debt would be shared among the members, regardless of who is actually taking the money. This measure is backed by the idea that some extraordinary situations should be dealt with collectively by all the European Union members. In the future, however, they might be used in order to collect funds from the markets for other kinds of European projects. If these eurobonds were to be approved, their interest must remain steady. To do so, fiscal policies of the European countries should be coordinated, and so their political views. This huge crisis we are living through might then turn out to be an opportunity to strengthen the political union that the EU has been trying to build up for years.
It should be taken into account as well that recently the ECB has approved the Pandemic Emergency Purchase Programme that allows the Bank itself to buy bonds issued by countries and international organizations without limits. Theoretically, if the eurobonds were to be issued, the ECB would be able to purchase all of them. This seems as a clear call to action from the ECB. But, as Draghi said, we have to act with speed.
The major problem is that, as they currently are, the available instruments will lead to an increase in inequality among countries. In fact, not only are the countries most affected by the pandemic obliged to pile up more debt, but they also need to go through the tough ESM procedures in order to get more liquidity. It seems like a punishment for countries that are already going through a difficult situation that is not their fault. For these reasons, the coalition led by Italy, France, and Spain is asking for changes. On the other hand, states like Germany, the Netherlands and the Nordic countries – that are all financially in good health – do not want to ease the conditions.
In my opinion, it seems like a huge myopia to not consider that, if those who are most needy now are left alone, the outcomes will be much worse than the ones caused by a reduction in austerity. In the best-case scenario, these countries will go financially under, pulling the other European economies with them; in the worst-case scenario not only will this crisis open the doors to a depression, but the voice of Eurosceptics will take the lead in these countries. And there will not be many arguments left to defend the benefits of European integration.
The European Union, despite what it declares to be, is now lacking in unity. The pandemic has hit all of us: not only in Italy, not only in France, not only in Spain. It is a war that we have to all fight together. Countries should set aside their singular interests and reorganize their forces as a group. Otherwise, if we fail to deal with this crucial moment, it is not so surreal to think that the European dream could soon implode.
Image from: toonpool
In this series, our writers share their thoughts on the ongoing COVID-19 pandemic. They rely on personal experiences and observations during this difficult time. The opinions expressed here are the authors’ own and do not necessarily reflect positions of European Generation.