Europe’s difficult COVID-19 response: Which bonds still tie us if not coronabonds?

By Carmen Bell, Account Director


In the decade following the 2008-09 financial crisis, the EU never fully agreed on just how it would achieve political solidarity. Today’s COVID-19 pandemic shows there may be consequences to this missed opportunity.

The virus has ravaged Europe’s economy and triggered a flurry of videoconferences on mitigating the impact of an impending recession. The US under Donald Trump has turned inwards (“America First”) while disinformation about the EU’s crisis response flows from Russia and China. Populists point to Europe’s uncoordinated response as the ultimate proof of the EU’s failure.

Consequently, European Commission President Ursula von der Leyen seems derailed from her ambitions for a stronger, geopolitical, autonomous EU. Her flagship European Green Deal, intended to propel the EU into a leading role, is destined to take a backseat as she is faced with other priorities – what does the EU still stand for, pure economic integration or something deeper? Can it achieve modern day solidarity?

When push comes to shove

This week’s marathon Eurogroup meeting demonstrated that EU finance ministers are wising up to these questions. After days of national rhetoric, Northern fiscal hawks and Southern risk-sharing proponents reached agreement last night – Member States can obtain loans through the EU’s European Stability Mechanism so long as they link them to financing COVID-related healthcare and prevention costs.

This comes on top of other “innovative” solutions to be made available to all eurozone countries, such as the Commission’s 100bn EUR unemployment reinsurance initiative, SURE, and a 200bn EUR pan-European guarantee scheme through the European Investment Bank.

The outcome entailed compromises on both sides. It is a big step from the Dutch-led demand that borrowing countries must also promise economic reform, which, for some, triggered uncomfortable memories of post-financial crisis austerity. The South’s preferred solution, debt mutualisation, or “coronabonds”, didn’t make the cut, at least not in its proposed form. Considering the meeting reportedly ended with clapping, this may have been more of a leverage point than a red line.

The other star of the night was the “European Recovery Fund”, resembling a proposal by French finance minister Bruno Le Maire last week. Le Maire had suggested a 3 to 5 year “solidarity fund” managed by the Commission and financed by the next EU budget, the so-called 2021-2027 Multiannual Financial Framework (MFF).

Unsurprisingly, the details remain vague. Eurogroup Chair Mário Centeno suggested further discussion at the next European Council, postponing the answer whether this is “coronabonds” by another name. But the Commission seems supportive. Economy Commissioner Paolo Gentiloni maintained COVID-19 is a symmetric crisis and that a plan for recovery – through “a powerful and flexible budget” –  could “mitigate the chance of asymmetric consequences”. This, in itself, sets a new path for the EU budget debate.

A Marshall Plan for Europe

The Commission has already referred to the need for a budget-related recovery plan. Von der Leyen proposed last weekend that “a Marshall Plan for Europe” would send “a strong investment signal”, alongside other digitalisation, sustainability and resilience priorities.

The name is somewhat misplaced. The original 1948 Marshall Plan – i.e. the “European Recovery Programme” – was for Europe as well, offered by the US to help rebuild after the Second World War. It was successful in driving investment and introduced a new wave of industrialisation, opening up European markets to American exports.

But there was another motivation at play. The US wanted to preserve political stability in a post-war Europe. It knew authoritarianism could return under an impoverished system and that a thriving democracy was more likely under prosperous conditions. The Marshall Plan was as psychologically important as it was economically. It promoted peaceful co-existence, and ultimately the idea of solidarity and economic integration between erstwhile enemies.

A renewed promise of solidarity (“we are all in the same boat”) – a notion seriously undermined by countries’ early response to the current crisis – is what the EU now needs. For Brussels, COVID-19 represents more than a health disaster or recession-inducing event. It is a threat to the delicate fibre of the Single Market and, with that, the EU’s potential for realising loftier goals.

But it’s no easy road. The MMF, currently proposed at 1.11% of the EU’s gross national income, remains a fraction of what the 1948 US plan doled out. It will also be challenging so long as the South feels left behind and the North exploited. Increased spending by Brussels could also revive populist movements, driving the perception that funding the EU takes away from important needs back home.

Where do we go from here?

Unfortunately, there is little wiggle room so long as the demands of a common currency don’t match the demand for a common fund. The Eurogroup may have shown that when the EU’s very existence is on the line it can find – some would say, fudge – a solution. But the question of risk-sharing – from a financial crisis to a sanitary one – is still tricky territory.

Prior to the meeting, Centeno asserted “a Marshall Plan for recovery can only be financed by Europeans” and that “relying on the US or anyone else is not possible or desirable”. The lesson here may be that, for Member States to cooperate, there must be something they believe in first. A little reminder of how far they’ve come since 1948 may not be a bad idea.