Eurobonds are not the answer to coronavirus woes

Gideon Rachman: A crisis solution could be the thing that finishes the EU

An empty square in Madrid.

An empty square in Madrid.


There is just one question: Are we together or are we not? So said Bruno Le Maire, France’s finance minister, as he pleaded with other EU nations, above all Germany, to demonstrate solidarity in the face of the coronavirus pandemic.

For many in southern Europe, solidarity means one thing above all: eurobonds. France, Italy, Spain and six other EU countries have thrown their weight behind the creation of joint financial instruments by the EU, as the best possible response to the pandemic.

The arguments they make are both political and economic. Eurobonds are meant to prevent some of the worst-affected countries, such as Italy and Spain, being sunk by new debts.


They are also intended to show Europeans that “we are all in this together” – banishing the early disastrous images of China delivering medical aid to Italy, while the EU sat on its hands. Some Italian and Spanish politicians warn that if the EU does not act, their countries could lose faith in the European project forever.

The urge to demonstrate European solidarity and alleviate suffering is right. But eurobonds are the wrong solution. Rather than saving the EU, they could end up killing it.

Advocates of eurobonds stress the potentially disastrous effects on public opinion in southern Europe if ­northern Europeans fail to respond while the Italians and Spanish live through a tragedy. But northern Europe also has to consider politics and public opinion.

The mutualisation of debt within the EU has always been the reddest of red lines for the Germans, the Dutch, the Austrians, the Finns and others. If it is pushed through now - in an atmosphere of crisis - it could set a time-bomb under the EU.

The danger that southern Europeans will feel abandoned by the north has to be set against the risk that northern Europeans will, at some later date, feel exploited by the south. The Italians and the Spanish rightly resent being caricatured as lazy, spendthrift southerners. But the opposite caricature of the rich, egotistical, arrogant northerners is also unfair – particularly when it is larded with references to Nazism and accusations of immorality.


Voters in the Netherlands and Germany also feel squeezed by long years of austerity. And both countries have also been badly hit by coronavirus. Hospitals in the Netherlands are on the brink of running out of critical care beds.

The longer-term fears of the northern Europeans are also legitimate. As one Dutch friend put it to me with pardonable exaggeration: “We know that the savings are in the north and the debts are in the south.” The northerners are alert to any sign that they are being sucked into permanent, large transfers of cash to heavily indebted EU partners. They are justifiably concerned that the current anguish is being used to push forward ideas that they have already rejected, many times over.

When I pointed out to one particularly passionate supporter of eurobonds that the Germans and Dutch had always been assured by their leaders that the creation of the euro would not lead to a transfer union, he responded, with a mixture of exasperation and amusement: “That was always bullshit.”

But if political leaders renege on longstanding promises because they were “always bullshit”, they should not be particularly surprised if voters then turn to populist, anti-European parties. In Britain’s Brexit debate, two of the most potent arguments made by the Leavers were “we never signed up for this”, and “Brussels is draining us of money”. It would be naive to believe that those arguments can never work in continental Europe. Anti-EU parties have already made strong gains across northern Europe in recent years.

The mistake made by the advocates of eurobonds is to argue that they are the only way - or even the best way - of sharing the financial burden of the pandemic. In reality, setting up the legal structures for eurobonds would probably take several years. By contrast, there is already a European Stability Mechanism up and running that can lend to crisis-hit countries.


The Italians and the Spanish reject the ESM because it makes loans that would add to their debt burdens, and that come with conditions attached. They fear that the anguish of a pandemic could now be supplemented by the horrors of a Greek-style austerity programme. But this is a natural disaster so the ESM could attach very light conditions to the loans, simply specifying that all the money has to be spent on dealing with the direct consequences of Covid-19. The Dutch have also proposed disaster aid - grants not loans - and that, too, should be considered.

Once the pandemic is over, Europe can return to the debate over eurobonds. I have my doubts whether they will ever be politically sustainable. But, if they are tried, they should be backed by giving the European Commission a larger budget, underpinned by a dedicated EU tax. Armed with more capital and its own resources, the commission could then borrow from the markets.

That kind of major step should only be taken once national politicians have made and won the argument with their voters. The alternative method - using a crisis to force through a controversial and irreversible change - is often praised in Brussels. But, for its own future, the EU has to do better than that. – Copyright The Financial Times Limited 2020

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