Coronavirus has brought European economies to a standstill. Even Germany, the economic powerhouse, is preparing for inevitable recession. Many governments across the continent have approved massive relief measures in the wake of the economic difficulties that this pandemic is creating.

But additional stimulus will be needed, and it will need to be along the lines of the amounts deployed in the United States. Spain has put its economy – which was already wobbly – into a coma, while Italy has extended the lockdown and France has cut production by one-third. But these are only temporary steps.

Governments must find hundreds of billions of euros, if not more, to pay furloughed workers, maintain overwhelmed healthcare systems and launch what they hope will be a recovery in the second half of the year. To do this, nine Eurozone governments hit by the pandemic, led by Italy, Spain and France, have proposed tapping the market with a collective bond, i.e., the Eurobonds that leaders have been talking about for over ten years. 

What are Eurobonds?

Eurobonds were recently renamed Coronabonds when they were proposed as a way to cover the costs that European governments will find themselves shouldering in the wake of the virus. Simply put, they are government bonds issued jointly by the countries in the Eurozone.

In this way, the debt would be shared, making the borrowing cost lower for deeply indebted countries, and the proceeds would be allocated to Eurozone members based on their actual needs.

Eurobonds were initially conceived as a counter-measure to the 2008 financial crisis that brought a series of European countries to their knees, particularly Greece, and various versions have been proposed over the years. However, no proposal has ever convinced all the countries, and the Coronabond is no exception.

Divisions among EU countries

According to the nine pro-Eurobond countries, they would unite the bloc at a time of crisis. But Germany, the Netherlands, Austria and Finland are opposed to the massive structural reorganization that they would entail, and the political climate within the Union is not the rosiest.

Anti-Eurobond countries wonder whether sharing debt is genuinely necessary. The ECB recently announced a €750-billion plan to purchase the debt of European countries in a deliberate attempt to keep borrowing costs as low as possible for indebted nations like Italy and Spain. And it worked: the long-term yield spread between Italy and Germany has remained low and is only a fraction of what it was at the most difficult moments of the last financial crisis.

The Dutch and German leaders suggest that there are other instruments that would work just as effectively. For example, the European Stability Mechanism (ESM) is a European fund with over €400 billion to bail out countries in crisis.

Southern European countries retort that, even if 100% of the ESM’s funds were to be used, it would only inject a small amount of liquidity into their economies, whereas this is a crisis that requires a wartime response, one that is ten times larger than the ESM.

The consequences for the EU

The dilemma is not just how countries will fund the measures to cancel the short-time damage. The bigger question is what will happen to the European Union, which was already on the verge of break-up after the financial crisis, with tensions fuelled by the persistent resentment of countries like Greece and Italy against nations like Germany.

Although there is not much time left for Finance Ministers across Europe to find a solution, a shared response is not beyond reach. For years, many Europeans have wanted to consolidate the monetary union by forming a genuine fiscal union, like the United States. However, it is clear that as Europe struggles with a public health emergency, it is fighting an economic and political battle as well.