Seven leading German economists call for €1 trillion of European crisis bonds

The New Statesman publishes an unprecedented call for common action to address the economic crisis. 

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In an important intervention on the economic emergency caused by coronavirus, seven prominent Germany-based economists have called for Eurozone states to stand together by issuing collective debt. The group (six Germans and one Austrian) comprises some of the most important voices in German economic debates - including the longest-ever serving member of the country’s Council of Economic Experts and the heads of three of its top economics institutes - and offers a clear message: “The coronavirus could become a second Eurozone crisis… now is the time for action.” Their open letter has already appeared in German (in the Frankfurter Allgemeine Zeitung), French (Le Monde), Spanish (El Mundo) and Dutch (Het Financieele Dagblad). Today the New Statesman publishes it in English, in a version revised for global readers.

The economists’ argument for the common debt, sometimes called Eurobonds, is compelling. They warn of an unprecedented fall in both supply and demand in the Eurozone as offices and factories close and consumers stay at home, leading to soaring unemployment and unsustainable debt for individual member states. At present the common currency area is moving towards a package of support measures: a massive monetary stimulus (the European Central Bank is buying €750bn of government debt) and probably a tooled-up European Stability Mechanism (ESM, the union’s bailout fund) to support governments in difficulty. But the severity of the slump may outweigh even these measures and cause a huge loss of productive capacity stymying any post-virus recovery. This could be followed by a spiral of punitive and unpayable debts for the economies hit hardest and, quite possibly, rising anti-EU forces in those countries.

So the seven economists call for a bigger bazooka: €1 trillion of crisis bonds (equivalent to 8 per cent of the Eurozone economy) as an emergency pool of long-maturity funding for member states at risk of insolvency. This, they argue, would help particularly stricken countries avoid the spiral of ever-higher borrowing costs by spreading liability for the debt across the Eurozone. It would also be a safe asset, a low-risk security backed collectively by the governments of a huge economic bloc that banks could use as collateral for loans to the private sector; reducing the risk of a “doom loop” of failing banks and insolvent governments. Combined with monetary stimulus and more proactive and less punitive ESM support, the economists argue, this would enable the Eurozone to “stand together” and use its collective weight to support those in most difficulty: “the strong must help the weak.”

A particularly striking aspect of this call is that it emanates from German economists. The Eurozone is currently heading for an almighty showdown over the right balance between solidarity and prudence in dealing with the economic fallout of the pandemic. In a letter to the European Council president Charles Michel last Wednesday (25 March), the heads of nine member states, led by France, Spain and Italy, called for such 'coronabonds', but they were severely rebuked by their German and Dutch counterparts in a video summit the following day. 

Peter Altmaier, Germany’s economy minister, has dismissed the issue as a “phantom debate”, Ursula von der Leyen, the German president of the European Commission, has called it “just a slogan” and Wopke Hoekstra, the Dutch finance minister, has insinuated that southern Europeans did too little to shore up their finances before the outbreak. The southern camp have shot back, with Portugal’s usually diplomatic prime minister, António Costa, calling Hoekstra’s comments “repulsive”. With such divisions it seems highly improbable that the bonds will materialise any time soon. And that is without getting into the epic wrangle over terms and conditions that would ensue in the unlikely event that they did. 

And yet the debate cannot and must not be dismissed - for three reasons captured by the article the New Statesman is publishing today. 

First, this crisis truly is different from others in a way that makes any absolute predictions about Europe’s economic and financial debates foolhardy. It is different in scale: the increase in debt-to-GDP ratios incurred as Eurozone governments try to prop up their economies may well dwarf those of the last Eurozone crisis. It is also different in nature. Where in the last crisis creditor states could claim (often erroneously) that the fundamental problem was a lack of fiscal discipline in southern states, the current crisis is clearly no European country’s fault and all are clearly vulnerable to it. So supporting states in difficulty does not run the risk of moral hazard, or creating a precedent where the spendthrift know they will be bailed out. The authors of the article compare the current extraordinary moment to the 1973 oil crisis, when the then European Economic Community issued a Community Bond to help member states.

Second, things are moving. It is extremely significant that the article is signed both by economists who have backed Eurobonds in the past (such as Peter Bofinger, known as one of Germany’s “last Keynesians”) and by some who have opposed them (such as Michael Hüther and Gabriel Felbermayr, both heads of institutes sometimes associated with rules-based “ordoliberal” thought). 

At a European level, too, the political ground is shifting. The nine leaders who wrote to Michel last week included Leo Varadkar, Ireland’s Taoiseach and usually a member of the hawkish, Dutch-led “New Hanseatic League” in the Eurozone. They have since been joined by five other member states including three other members of the League (Latvia, Lithuania and Estonia), a sometime honorary member (Slovakia) and Cyprus. Now 14 of 19 member states of the Eurozone - as well as ECB president Christine Lagarde - back the idea of some sort of jointly issued bonds. That would have been hard to imagine not long ago. 

Third, the picture is also more complex than it seems. The debate about common crisis bonds is awash with crass, oversimplified stereotypes: thrifty (or myopic) northerners versus solidaristic (or profligate) southerners, Germanics versus Latins, Berlin and The Hague versus Paris, Madrid and Rome. Yet the reality is far more nuanced. Not all German authorities are against more ambitious visions of European solidarity in the current crisis, as this article shows. Indeed Robert Habeck, co-leader of the German Greens and a possible vice-chancellor in a future government, is one of several prominent German politicians to give crisis bonds his backing. 

So judge this letter not just by how much leaders act on its demands in the immediate future but by a bigger and broader metric: the long-term direction of the Eurozone’s economic debate. Europe tends to muddle rather than stride forward, the contingencies of one crisis solidifying into new structures and norms which are revised again at the next one. Some, for example, are arguing that given the current deadlock, pro-eurobond countries should go ahead without the others. Perhaps interventions like this one by seven respected German economic experts will help give them the courage to do so. The question is not whether the collapse of European economic activity caused by coronavirus will profoundly affect the Eurozone's institutional settlement - but how.

Jeremy Cliffe is International Editor of the New Statesman.

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