In response to the economic consequences of the new coronavirus pandemic, the European Union, the Eurogroup and the Member States have presented several proposals (European Stability Mechanism (ESM); European Investment Bank Plan, SURE, Marshall Plan, Eurobonds or Coronabonds). One of the controversial options is the issuing of Eurobonds or "coronabonds".

Laurent Baechler, Arnaud Leconte and Jean-Claude Vérez, all three economists and Directors of Master programmes at CIFE, examine this option on the table for discussion among EU Heads of State and Government.

  What is a eurobond or a coronabond (or recovery bond) and what do we know about the principle of debt sharing?​

A eurobond is a bond issued by the European Central Bank. By offering bonds, debt securities that public or private investors (such as insurance companies, banks or investment funds) can subscribe to, the ECB enables European countries in the euro zone to finance their deficits. These securities are denominated in euro. Instead of the national guarantee that characterises a national bond, Eurobonds benefit from the European guarantee. They are bonds issued jointly by Euro zone countries on the international markets.

A coronabond would have the same characteristics and would aim to finance expenditure due to the macroeconomic consequences of the coronavirus. It should be pointed out that the bond would be financing this expenditure alone and not national public expenditure of any other nature.

Debt sharing consists of opting for joint financing of public debts. It is not a question of one Euro zone country paying off the debt contracted by another country. Only the bankruptcy of a member country of the zone would force the other countries to take the place of this default, and this could happen without having shared the debts.
 

What are the advantages or benefits of using eurobonds?

The advantages depend on the asset class of these eurobonds or coronabonds, their terms, conditions and underwriters. In terms of asset class, the question is whether they belong to green or social linked to the EU's long-term investment objectives drafted in the Green Deal (green bonds to combat climate change and biodiversity loss, social bonds for activities linked to demographic change such as financing heavy dependence or even to prevent and combat future epidemics).

Regarding the terms and conditions, an important element is that these eurobonds are issued not as a permanent solution, but as a temporary one in the case of a systemic crisis. A second important point concerns the underwriters: those from the private sector and internationally will want to model risks for profit rather than to protect the victims of a pandemic. However, in times of crisis, there is a slowdown in the overall bond market and a focus on short-term liquidity. In fact, favouring institutional underwriters (pension funds, insurance companies) and European savers would make it possible to limit the risks of loss of sovereignty and capital flight in the event of another major European crisis.

In short, the advantages of "Eurobonds" are to ensure financing of the common good at lower risk and at lower cost and to support the mutual efforts of Europeans on the long term in a situation of systemic crisis. They give a strong signal of financial stability and take up the idea of a common and united future in Europe.
 

What are the risks associated with eurobonds?

The risk associated with eurobonds, at least for those who perceive them as risky, is that of "moral hazard", a term that economists use to refer to a situation in which an actor, benefiting from some form of protection against a risk, tends to protect himself less. In the present case, this hypothesis would relate to the so-called "spendthrift" countries, which are confronted with high levels of public deficit and debt, mainly in the south of the euro zone. This risk is supposed to be increased by the fact that the most indebted states could borrow at lower rates, no longer corresponding to the level of financial risk they represent for their creditors.

In the case of the coronabonds, these risks could be greatly limited by two elements:
1/ A restriction of financing capacities to expenditures directly related to the impacts of the health crisis. The perimeter of restriction would obviously be a crucial composition of the discussions between the involved countries.
2/ A mechanism to control the expenditure involved that would make it possible to avoid "leaks" and reassure countries that are resistant to the principle of debt sharing.

A last crucial point must be added. The current health crisis is due to an exogenous shock resembling a natural disaster for which no one is particularly responsible, unlike the endogenous shocks of financial and economic crises (which generally originate in stock market or real estate speculation movements). Nor are the resulting public expenditures the result of uncontrolled slippage in public finances by spendthrift governments. This not only argues in favour of European solidarity to make the collective effort necessary to get out of this situation, but also means that the "moral hazard" dimension is very much attenuated (or even absent) in the present situation: there cannot be (by definition) an incentive to allow a risk of an exogenous nature to reoccur.

Alternative option to eurobond or coronabond

European “solidarity” budget: Alternatively, under Article 122, paragraph 2 the European Council, on a proposal from the European Commission, may grant, under certain conditions, Union financial assistance in the forms of guarantees to the Member State concerned by difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control. This solution favoured by Germany would not be an eurobond as such, but temporary financial transfers e.g. via an extended European “ solidarity” budget to EU Member States particularly affected by the crises.