Momentum is building across Europe for a radical new financial response to the crisis, one which, if administered successfully, would address the pandemic, help finance an economic recovery and break with a decade of austerity economics. This is the campaign for coronabonds, a new common debt instrument, which began with a 25 March letter from nine EU member states, led by Italy and France, calling for a common response, with new common spending and borrowing capacity. The idea has since spread widely in civil society and across progressive forces, uniting German greens, Dutch social democrats, Italians of all parties and French centrists.
For Europe’s sake, it must succeed. The economic toll of this crisis will be terrible and the consequence for the continent’s unity and future could be disastrous. This is why coronabonds are a political and economic necessity – one so vital that statesmen should be ready to break with unanimity and piecemeal engineering by launching a coalition of the willing to achieve true solidarity in response to the coronavirus crisis.
What is at stake
Due to different national debt levels, and thus divergent debt refinancing costs, not all European states have the same financial capacity to fight the crisis and finance reconstruction. For now, the European Central Bank (ECB) is stabilising the crisis; suppressing national borrowing costs through vast quantitative easing, allowing weaker eurozone states to borrow cheaply to fight the pandemic and support their economies.
Yet this cannot last indefinitely. In the absence of clear political support and a firm commitment to mutualise some of the costs accrued fighting the crisis, the ECB will eventually find itself weakened and isolated. Investors will lose confidence and markets will again start questioning the unity and irrevocable nature of the single currency and the European project, causing financial fragmentation and reviving the risk of euro redenomination.
The risks of inaction are manifold. Doing nothing risks both economic and political catastrophe: it would create profound doubt about Europe’s purpose, punish pro-European governments and reward their populist, anti-European, nativist rivals.
This is why the campaign for coronabonds is fast becoming an instrument uniting Europe’s north and south. Seven of Germany’s leading economists have called on Angela Merkel to break with Germany’s opposition to “Eurobonds”. Former cabinet minister Joschka Fischer, philosopher Jurgen Habermas and other German progressive luminaries, along with Robert Habeck, the leader of the German Greens, and Der Spiegel magazine have now expressed support.
Meanwhile, in the Netherlands too a fierce debate is raging, with progressive opinion moving in favour of mutualised debt. Lodewijk Asscher, the leader of the Dutch Labour Party, has come out in support of coronabonds, along with the Dutch Greens. In France and Italy, beyond governments’ official endorsements, leading public intellectuals such as the economists Gabriel Zucman and Camille Landais have devised original proposals to raise resources, and all against the dark backdrop of a far right that seems only to hope for European failure, so that Marine Le Pen and Matteo Salvini can denounce the EU once again.
What must be done
In order to succeed, Europe’s statesmen must learn the key lessons of the Eurozone crisis. This means forgetting unanimity, which at 27 member states or even at 19, is a recipe for inaction. Instead, consensus must be built around a coalition of the willing open to all member states. This doesn’t preclude agreeing to additional policy tools with the rest of the EU and the euro area, such as the use of further guarantees from the European Investment Bank, or projects by the European Commission to establish a tentative backstop to national unemployment schemes, but leaders must remain committed to establishing the instrument for a true mutualising of resources and a new common borrowing capacity.
This could be implemented in several stages, but the starting point could be to invoke the Solidarity Clause (Article 222) of the EU Treaty, which enables the EU and member states to act jointly against a natural or man-made disaster. On that basis, the coalition of the willing should establish a Coronavirus Solidarity Fund with exceptional contributions from member states; second, the coalition must task the commission with creating a Coronavirus Agency to coordinate the member states and transform the fund into a vehicle for delivering financial assistance; third, it must provide the fund with its own financial resources by taking a portion of VAT, and using climate transition taxes on carbon emissions or air travel; and finally, it must permit the fund to borrow to fund current efforts to stem the crisis, support neighbouring and developing countries and finance the economic recovery across the union. These measures are all legal under existing EU treaties.
Why we must take the risk
There are embedded risks in this approach, both in failure and in success. With failure, Europe takes the risk of exposing the EU and its monetary union as lacking credible solidarity and purpose. This would signify, to those who continue to question it, that the EU will rarely act as anything more than a powerful market and a powerless currency board exposed to the political winds of external threats and domestic populists.
With success, we risk political fragmentation of the eurozone between the coalition of the willing and those who won’t participate. Ideally, the coalition of the willing would be led by France and Germany together, with those absent representing merely a few holdouts. Should Germany refuse, coronabonds still provide a strategy to respond collectively to the virus and avoid possible defaults, austerity, bailouts and populist backlash. The population of the “Coronabonds Nine” is already over 213 million people, and with the Baltic countries and Slovenia facing troubles on the international bond market it could grow quickly. This political fragmentation, however, would not signal the fragmentation of the euro itself provided the coronabonds issued are backed by the ECB. The choice is therefore between political division with a potential sovereign debt crisis and loss of investor confidence in Europe, or such division without the debt crisis.
In essence, now is the time for bold action: for leaders to take measured risks, embrace the transnational call for solidarity heard across the EU, and to hold their nerve. Not all these steps can be taken at once and they will all be subject to challenges, but they are all legally and politically possible provided there are enough member states willing to go ahead. Importantly, because this plan is entirely embedded in EU law, it would force the Brussels institutions to side with the member states taking part rather than with those opposing it. This is not without danger; but the risks of inaction are greater, both economically and politically.
Ben Judah is a fellow at the Hudson Institute and Shahin Vallée is a senior fellow at the German Council on Foreign Relations