The Eurobonds Battle: Solidarity And Fiscal Rigor Don’t Want You To Know
Eurobonds Battle The southern countries demand joint debt issues. The north refuses more economic transfers. And experts remember that any joint action implies more budgetary control
It is difficult to draw analogies with the European Union. It does not function as a government, nor as the rest of international organizations. Its treaties, practices and mechanisms have been outlined in a very concrete way, so that often, from the outside, the procedures and results are interpreted in a completely opposite way to how it is done from the inside. Thursday’s Eurogroup agreement is a good example. The participants were satisfied and the parties, all, believe that it is quite solid. Each minister sells it as a victory (Italy, the Netherlands) or as an advance (Spain, Germany). But many citizens of the north consider it an intolerable waste, and in the south they call it insufficient, selfish and oblivious to reality.
Perhaps the best example to gauge what happened is that of the Eurobonds or Coronabonos. A lot has been said about them these weeks. From a joint debt issuance mechanism in the EU or the Eurozone with which to finance the costs of rebuilding the pandemic, easing pressure on the most affected and leveraged countries, such as Spain or Italy. The Heads of State and Government have spoken vehemently. Nine leaders, with Sánchez, Conte, Costa or Macron, asking for them now. Others, such as Mark Rutte, Angela Merkel, the Austrian Sebastian Kurz or the Finnish Sanna Marin, totally against it. But the truth is that yesterday’s Eurogroup were not at the center of the discussion. To enormous expectations, gigantic disappointments.
They were discussed, of course, but not for now. At no time was there any chance that they would be approved at that meeting or last. Or in two weeks at the next Summit. This is for later, for the costs of recovery, and the issue is so controversial that something like this could only be unblocked by the prime ministers, and right now, impossible. Even with consensus on its benefits, and it does not exist, political and ‘pedagogical’ work in certain latitudes would take many months. The technician, maybe even more.
When the forerunner of the Mede was created to rescue Greece, it took seven months against the clock to issue the first bond. There is no way to do something like this with half a trillion or a trillion euros, through a new Reconstruction Fund, in the short term.
Now You Can Have The The Eurobonds Battle: Solidarity And Fiscal Rigor Of Your Dreams – Cheaper/Faster Than You Ever Imagined
That said, it is clear that the tone has changed on the continent, it has been debated more than ever and voices that were previously lukewarm on this issue have begun to cry out for bonds. Even in Berlin and Frankfurt. But what the debt crisis failed almost a decade ago is difficult for it to achieve, least of all with the huge open ECB umbrella. It could be said that we are closer than ever to Eurobonds, but as far as (almost) always.
There is strong pressure, academic and media, but also political in all national parliaments. Without precedents. It remains to be seen whether maintaining this momentum due to the idea or the Eurogroup pact for a three-level first line of action causes it to be lost, as analysts always pessimistic about the likes of Wolfgang Munchau, from Eurointelligence, fear.
The debate is not cyclical. It goes to the heart of the beliefs, political and cultural, of many. Angela Merkel famously stated a few years ago that Eurobonds were not going to be a reality while she was alive, or at least at the head of Germany. Rutte and his minister Wopke Hoekstra say the same thing. What is “crossing the Rubicon”, going far beyond what is stipulated in the Maastricht Treaty and formalizing the Union of transfers (that is, of direct transfers of resources from north to south) that they have always feared and fought against.
That it would be unfair and unacceptable to its taxpayers, who are highly sensitized and in some cases radicalized. The lack of eurobonds seems that it may generate doubts or anti-Europeanism in the south, but the materialization of the same would consolidate and trigger the existing one in the north, where there is zero appetite for more transfers of economic sovereignty. From the Nine who ask for it, they maintain the opposite. Than now or never. That they are necessary, essential, in economic and political terms. That only in this way will we be a true Union, also standing up in its lowest hours.
The final Eurogroup statement makes no mention of these instruments of any kind, a necessary omission for compromise. But using the same community logic mentioned above, there are times when in Brussels it matters as much what is not there as what is. Or rather: everything that is not expressly ruled out is still possible. And there are experts, diplomats and officials who say the bonds are on the table right now.
Actually, there are already several types of ‘Eurobonds’ on the markets. The European Commission has in the past issued billions for the European Financial Stability Mechanism (EFSM) or the so-called Balance of Payment, which provides emergency aid as well, but for countries that are not in the single currency. And it will do it again to raise up to $ 100 billion to finance its Sure program, which will help States maintain employment in companies. Using countries as capital guarantees.
The European Investment Bank does the same. And of course the controversial Mede, who thus financed the bailouts of Spain, Portugal, Greece or Cyprus. That is not ‘pure Eurobonds’, of course, there is an issue but then credits. But it is that on the table there are infinite possibilities. One could think of a bond issued jointly, taking advantage of the AAA rating of the richest, but for which each country would only assume responsibility for the proportional part of the size of its economy over GDP. In the past, however, this type of formula, which has required too much conditionality, has become toxic. Or as the Elysée seems to be shuffling, launching into broadcasts among those who are willing to take the step now. With perhaps a somewhat lower rating, but sending a message and leading the way.
Six years ago, a group of experts led by the Austrian Gertrude Tumpel-Gugerell presented a report on the viability of a debt amortization fund and euro letters. At the request of the European Parliament, Durao Barroso wanted to examine the “merits and risks, legal requirements and the financial consequences of initiatives for the joint issuance of debt.” The experts concluded that it could be done and that these mechanisms would serve to speed up the transmission of monetary policy or strengthen public debt markets. But they also warned of the inherent risks given the architecture of the Eurozone, and feared that they would pose perverse incentives of fiscal laxity among those who would benefit from a blow of cheaper financing.
Having Eurobonds, or Euro Letters, is not a panacea. There is no common fiscal policy, there is no common Treasury, but if there were issues, they would have to go hand in hand, or preceded, with less sovereignty and greater fiscal discipline. In the aforementioned report, experts pointed out that countries like Spain would be forced to maintain a primary fiscal surplus of 2% for two decades to meet the conditions of a hypothetical joint debt fund.
From the Netherlands or Finland they believe that this is a chimera and that it would never happen. They regret that countries like Spain only made fiscal reforms and adjustments at the time of the rescue, and that they took their foot off the gas as soon as the pressure on them eased. That in Madrid or Rome they keep intact the pensions of their retirees when the northerners have had to cut them. And they condemn that we do not take advantage of fat cows to generate the necessary mattress for skinny ones, like them. And there is an undeniable part of truth. That is why they offer solidarity through existing community mechanisms, such as the Mede, and they would prefer a bailout involving macroeconomic adjustment. For our own good’.
There are experts who are theoretically in favor of joint issues (and who believe that the package approved to date was necessary but not sufficient), but they doubt the suitability of Eurobonds and Euroletras or of ‘timing’. It is true that when the pandemic ends there will be members with double-digit deficits and 20 or 30 more points of debt that they will hardly be able to digest within a decade or two. And hence the need for solidarity and joint efforts and investment. But analysts also warn of the dangers of straining institutions in times of emergency. Diego Valiante, professor at the Bologna Unit, warns that mistakes have already been made in the past, such as making a monetary union without a fiscal union. And that forcing now bonds without a single Treasury or a greater fiscal convergence, can be a more dangerous remedy than the disease.
To contextualize the debate, it would be positive if the most involved actors said exactly what they want, how they would design it and what conditions and consequences they would have. They ask for solidarity, mutualization, but the north is still not very clear what they offer in return. Years of systematic rule-breaking, failure to take advantage of growth to clean up accounts, and unfulfilled promises are not the best cover letter.