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Europe divided along north-south lines over coronabonds

posted onMarch 30, 2020

In their six-hour video conference call last Thursday (March 28) the 27 EU leaders postponed a final decision on the introduction of Eurobonds-or coronabonds- as a joint instrument for funding member states’ fights against the coronavirus. 

Nine EU countries have been calling for such bonds to be issued EU-wide: Spain, Italy, France, Belgium, Luxembourg, Ireland, Portugal, Greece and Slovenia. 

In their letter addressed to the President of the European Council Charles Michel, the nine heads of government say “the case for such a common [debt] instrument is strong, since we are all facing a symmetric external shock, for which no country bears responsibility, but whose negative consequences are endured by all”. It should have “sufficient size and long maturity to be fully efficient”.

Skeptical stance toward communitised debt

But Germany, the Netherlands, Austria and Finland, also known as the "Frugal Four", have so far rejected the use of coronabonds. Speaking after the video summit,  German Chancellor Angela Merkel said that the the EU's bailout fund, the European Stability Mechanism (ESM) was her "preferred instrument".

"With the ESM, I think we have a crisis instrument which opens up a lot of possibilities, and which does not call into question the basic principles of joint but also individually responsible action," the Chancellor added. 

The ESM, the euro area’s permanent bailout fund set up in 2012, is an international organisation that provides loans to heavily indebted member states in crisis in exchange for austerity measures and is unpopular in southern European countries.

This is not the first time the call for euro bonds has been met with  resistance -- especially from the Germans. At the height of the 2008-12 euro crisis,  Merkel had assured the Free Democrats that  "as long as I live," there would be no euro bonds, according to The Spiegel.

conte merkel coronabonds

(German Chancellor Angela Merkel and Prime Minister of Italy Giuseppe Conte during a press statement at the Chancellery in Berlin, Germany, 18 June 2018. [Filip Singer/EPA/EFE]

Growing frustration and anger 

The French broadcaster France24 also revealed that heated exchanges between EU leaders took place during the video summit  with "intense disagreements" sparking a furious row. The summit ended with a declaration giving eurozone finance ministers two weeks  for further talks on the economic response to the pandemic. 

Following the angry exchanges, Italian newspaper headlines condemned the EU response.

 "They want us to get into debt so they can punish us," ANSA quoted Industry Minister Stefano Patuanelli as saying while Foreign Minister Luigi Di Maio said "Europe should be more fair".

Former Italian Prime Minister and main opposition leader Matteo Salvini  tweeted on Friday: 

“First let's beat the virus, then think about Europe again. And, if necessary, say goodbye. Without even thanking it." 

Of note, on Friday, Italy overtook China to become the second-worst affected country after the US. 

Commentators analyse options for breaking the stalemate

As EU states are at odds over coronabonds Dr Paul Gillespie writes at The Irish Times: 

“Those Germans, Dutch and others who resist that conclusion in the name of moral hazard must reflect on whether their preferred approach now endangers the whole European edifice from which they have benefited so much through extending markets, free movement and economic power. That regime is unlikely to survive this crisis without a deeper solidarity capable of tackling it more commonly.” 

Last week, over 400 academics specialising in EU political economy sent a letter to the Financial Times stating:

“No member state should have to seek a bailout or sign a memorandum of understanding to access emergency funding. This is a European crisis. It requires a European solution.” 

And today European Commission President Ursula von der Leyen confirmed  that the instrument to help revive the European Union economy from a deep slump is in fact being considered.

"We will help Italy and Spain very intensively. Several instruments, including bonds, are being considered and are discussed in the Eurogroup," Von der Leyen told Politico in an interview. Still, "at the heart of our efforts" to tackle the coronavirus crisis, is the European Union's long-term budget, Von der Leyen said. "The Multiannual Financial Framework is a means of strategic investment and intra-European cohesion which is accepted by all EU member states," she explained.

Just as it was during the euro crisis, Europe is again divided along north-south lines. The issue of coronabonds exemplifies how the pandemic is testing EU unity and solidarity.

UPDATE 01/04/2020

German Minister of Finance Olaf Scholz will suggest that the EU creates a €200 billion aid fund instead of introducing coronabonds, Düsseldorf-based newspaper Handelsblatt reported. 

Under the proposal, €100 billion would be secured for loans from ESM to assist badly affected countries like Italy, Spain. The only loan condition would be that the firms use financial aid to fight the economic fallout from the pandemic.

Secondly, the European Investment Bank (EIB) should provide €50 billion in loans, potentially through a capital increase. Finally, an amount ranging from €50 to €100 billion would be dedicated to new EU unemployment reinsurance, the report added.

Meanwhile, Italian PM Giuseppe Conte in an interview to be published by German daily Die Zeit Thursday he said:

"Extraordinary instruments are needed, but they will be useless if they come too late". No country should try to exploit the coronavirus crisis to add past debts onto the shoulders of others."

Conte asked for possible instruments to be weighed "without a priori vetoes".

"We are a union and it is time to demonstrate that". He called for action that was "commensurate to the challenge of the moment."