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Article by Governor Carlos da Silva Costa in Reuters: European solidarity as the solution to the coronavirus emergency

Contrary to the circumstances that led to the 2008 crisis, the situation we are now facing reflects the propagation of a health crisis into the real economy, with its effects being amplified by the international financial system and global value chains. The cause is not idiosyncratic, it is common to all economies, and it does not lie in economic policy imbalances. To an exogenous and certainly transitory shock common to all European economies a joint response is needed.

Notwithstanding the much welcomed flexibility by the European Commission regarding State Aid and the Stability and Growth Pact, such flexibility is not sufficient. National solutions continue constrained by the implications they may have on the sustainability of Member States’ debt. In order to successfully address this emergency, all Member States regardless of the budgetary situation, must stand financially together, otherwise they risk financial markets exploiting the weakest link. Failure to cooperate in this crisis would permanently scar the European project.

As Member States have different scope for action in their budgets, solutions must be found in order to avoid that the coronavirus emergency becomes a second sovereign debt crisis. Initiatives are needed to allow members to finance their efforts to contain the impact of the pandemic by making their borrowing costs less dependent on individual fiscal situations. Different proposals have been put forward on the possibility of using the European Stability Mechanism (ESM) existing credit lines, or the creation of newly dedicated lines to address the coronavirus emergency. Nevertheless these solutions are flawed because their usage would still impact Member States’ total debt.

Although Eurobonds would be the appropriate solution, currently there is no ready-to-use vehicle for joint debt issuance by Member States. Innovative solutions are thus needed. One option that deserves further analysis is the possibility of having the ESM issuing ‘Corona bonds’, with the proceeds being channelled to all Member States in need, repayable through the European Union’s long-term budget (the multiannual financial framework) without upfront impacting Member States’ individual fiscal positions.

These ‘Corona bonds’ should be of very long maturity, say 30 years, in order to dilute the impact on Member States yearly contributions. The proceeds should be allocated to the financing of Covid-19 relief effort in proportion to the severity of the public health and economic challenges encountered. Different from standard ESM facilities, and commensurate with the emergency at hand, conditionality should consist in Member States committing to use the funds in Covid-19 related spending and removing these efforts once the crisis is over.

Such ‘Corona bonds’ would complement and reinforce the recently announced Pandemic Emergency Purchase Programme by the European Central Bank. 

European solidarity and risk sharing should now make a decisive contribution in order to counter the public health crisis and mitigate the economic impact the coronavirus emergency is having throughout all Member States.