15 April 2020

Andrew Duff: From lockdown to takeoff: The case for a federal eurobond

Muddling through

The Eurogroup (7-9 April) laboured long to take a clutch of measures designed to ease short-term liquidity problems.[1] The steps adopted, amounting to a possible €400 billion, comprise increased loans from the European Investment Bank (EIB), the offer of credits from the European Stability Mechanism (ESM), and a new temporary loan instrument by the European Commission to soften the blow of unemployment (Support to mitigate unemployment risks in an emergency, or SURE). The package complements the European Union’s earlier decision to relax its normal rules of state aid and public procurement, as well as the virtual suspension of the Stability and Growth Pact, for the duration of the COVID-19 plague.

Not for the first time in a crisis, it is the European Central Bank (ECB) that has been bold. Its new Pandemic Emergency Purchase Programme (PEPP) will allow the Bank to purchase €750 billion of national government bonds without being bound by the usual constraints of national quotas.

Even the most charitable reading of the decisions of the Eurogroup could not call them transformative. The net effect of the package is unlikely to stave off the eurozone’s next financial crisis once the true impact of the coronavirus pandemic is realised. Potential beneficiaries of the Eurogroup’s measures will be saddled with further national debt thereby accentuating regional imbalances within the eurozone.

Argument has already broken out about the meaning of the Eurogroup package, notably between the old adversaries, France and the Netherlands. Italy is refusing to use the ESM facility because of the political conditions attached. Negotiations on the new Multi-annual Financial Framework (MFF) for 2021-27 look to become even more fraught. The European Council, meeting by videoconference on 23 April, seems unlikely to calm the bad temper.

The heart of the matter is the failure of the Council to do more than promise further discussion about establishing a coronavirus recovery fund. The Dutch and Austrians, in particular, remain fiercely opposed to any measure which implies a mutualisation of sovereign debt.....

A federal recovery bond

The best solution is for the European Commission to issue a federal eurobond secured against the EU budget. This will require a significant rise – perhaps a doubling – in the current ceiling of own resources, set in 2014 at 1.2% GNI.[10] The recovery fund, created as a special purpose vehicle, will not be part of the EU budget, but the interest paid to bondholders will come from the EU budget. Revenue to cover those costs can be raised in several ways already proposed by the Commission, including a plastics tax, a digital tax, and proceeds from the carbon emissions trading scheme and a slice of a common consolidated corporate tax.

A federal eurobond will enhance the fiscal capacity of the Union without adding to national debt burdens, thus saving national treasuries money. The EU’s famous discipline of the balanced budget will be maintained.[11] Maturities offered should be lengthy to emphasise the significance of the first federal eurobond as an act of political and commercial confidence in the stability of the euro and the durability of the Union. The target would be to raise more than €1.5 trillion. At a time of deep uncertainty, the launch of the EU’s first federal bonds should be an attractive investment opportunity for governments, institutional and private investors.

The floatation of federal eurobonds is controversial, but it is far from being the first instance of real transfers of resources among member states. EU structural funds have been doing this for years, and the ECB’s monetary interventions have a similar non-uniform effect. Joint and several liability expressed through Union interventions in the market place is entirely consistent with the spirit of solidarity that imbues the EU Treaties.

Such an innovation will also resolve the otherwise intractable argument over the new MFF. A new own resources ceiling of, say, 2.5% GNI will give the Union all the fiscal space it needs over the next decade. The argument over a supplementary fiscal capacity for the eurozone will be redundant.

In the long run, fully mutualised debt security as a permanent fixture of EU fiscal policy will need the legal certainty that can only be provided by a formal, upwards shift of competence from the national to European level. Ultimately, a ‘sovereign’ Union means treaty change. The EU’s constitutional courts, led by the European Court of Justice, will tolerate nothing less. In the meantime, however, the special purpose vehicle of the eurobond recovery fund is the simplest and quickest solution, achievable without treaty change as part of the imminent decision about new own resources.[12]

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