Chancellor of Germany Angela Merkel and European Council President Charles Michel pictured during the second day of an extraordinary EU summit meeting on the European Budget 2021-2027, Friday 21 February 2020.
Pressure is building up in Europe to come up with new ways to mitigate the economic impact of the coronavirus, in the region that has become the epicenter of the outbreak.
Nine European countries have called upon their EU counterparts to issue so-called ‘corona bonds’ — a new debt instrument that would combine securities from different European countries.
Corona bonds are a controversial issue that has been dividing the 27-country region. Conservative policymakers in countries such as Germany, the Netherlands and Austria are often wary of the idea of issuing debt together with highly indebted nations, such as Italy, Greece and Portugal.
Nonetheless, Europe is in crisis, having experienced a sharp rise in new coronavirus cases worldwide since March, with several countries in national lockdown. As of Wednesday morning, there were more than 182,000 coronavirus cases in Europe.
“We need to recognize the severity of the situation and the necessity for further action to buttress our economies today,” the heads of state of Italy, France, Belgium, Greece, Portugal, Spain, Ireland, Slovenia and Luxembourg said Wednesday in a joint letter seen by CNBC.
The deadly virus has brought all the key EU economies to a standstill, with most people confined at home. Restaurants, cinemas and other retail spaces are closed, and airlines have basically stopped taking off. Meanwhile, the death toll across Europe keeps on rising, with Italy registering a higher number of deceased than China, where the virus first emerged.
“We need to work on a common debt instrument issued by a European institution to raise funds on the market on the same basis and to the benefits of all Member States,” the nine heads of state said.
The case for such a common instrument is strong, since we are all facing a symmetric external shock.
Nine EU heads of state
Their call comes within about 24 hours from a key conference call between the 27 leaders of the European Union, on Thursday, and adds pressure on countries such as Germany and the Netherlands where the idea of ‘corona bonds’ is deemed unnecessary.
It’s not the first time that the subject of issuing joint debt has been raised in the region. European countries had initial discussions on this issue at the height of the sovereign debt crisis of 2011, but certain nations believed it was too risky to join their debt with other countries, which were deemed at a higher risk of default.
The coronavirus has resurfaced the debate over joint European bonds given the unprecedented financial shock.
“The case for such a common 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,” the nine leaders said, suggesting that the current crisis is different from the global and sovereign debt crisis, where the region had been affected disproportionally.
Nonetheless, certain European capitals do not see the need to go as far as issuing common debt for now.
An EU official close to the discussions, who did not want to be named due to the sensitivity of the topic, said Tuesday that Europe is in a “very bad situation,” however, all countries are still able to tap the markets at “reasonable” rates.
The same official said that a Eurobond or corona bond would “take ages to negotiate.”
French President Emmanuel Macron listens to a video conference call with European leaders and with the European Council President at the Elysee Palace on March 10, 2020 in Paris.
The European Central Bank (ECB), chaired by Christine Lagarde, surprised the markets with a $820 billion coronavirus package last week. The decision boosted the lending capacities of every country in the euro zone, which should help them to deal with the economic impact from the virus.
The ECB’s decision calmed the financial markets, but it also lowered the pressure on European countries to present new financial instruments to deal with the crisis. The member states have also announced fiscal measures individually to support their own economies. However, the same level of ambition has not been seen at the European level.
“If we want tomorrow’s Europe to live up to the aspirations of its past, we must act today, and prepare our common future. Let us open this debate now and move forward, without hesitation,” the nine leaders said in their joint letter.