View from Berlin
There are toxic topics in every country’s politics. Think joining the euro or reversing Brexit in the United Kingdom, Europeanising nuclear weapons or pension reform in France, or universal healthcare in the United States. In German politics, eurobonds is one of the two or three such topics. It is a red rag for many politicians: the minute they touch it, they are putting their party at risk of a significant drop in the polls.
Viewed from Berlin, this explains why the new debate over coronabonds has been painful even for the many pro-Europeans who favour them. In Germany, nine member states’ recent call for such bonds was widely perceived as coming too early and too reflexively, and as raising an issue that only divides the European Union. In this view, the current debate – which seems to make the question of coronabonds the sole indicator of how much solidarity there is in the EU – is dangerous and might actually weaken European unity.
In conservative circles, many are convinced that the European Stability Mechanism (ESM) has proven a helpful tool for providing vast liquidity in times of crisis. They argue that, if Europeans abandoned the achievements of the ESM, all consolidation efforts of the last decade would have been for nothing. The crisis shows precisely why they’ve tried to be principled on fiscal discipline over the last few years – so that, in times of crisis, one has fiscal firepower – and that the “black zero” austerity policy has paid off.
Firstly, they think, Europe should exploit existing avenues rather than view the crisis as an opportunity to finally push through long-held plans to transform the eurozone into a transfer union. Coronabonds could establish a principle through the back door, they worry. At most, some in the union can hope for a one-off, targeted joint bond issuance to overcome the crisis, such as that which the European Community issued in response to the oil crisis in 1976.
Within the Social Democratic Party, the situation is less clear. While Finance Minister Olaf Scholz and Rolf Mützenich, the head of its parliamentary group, reject the idea of coronabonds, party head Norbert Walter-Borjans supports it. Although Germany’s liberal democrats and the Alternative for Germany (AfD) strongly oppose coronabonds, the Greens – and, to a certain extent, the far-left Die Linke – support them.
An interesting figure in the debate is Michael Hüther. Head of the conservative German Economic Institute, he has famously opposed eurobonds in the last decade, but is now calling for coronabonds limited to the crisis response. He represents a new tendency among German economists and business leaders to view bond issuance as being increasingly in Germany’s narrow interest – be it for geopolitical reasons or because the richest European country needs to provide certain public goods in times of crisis.
But these voices do not appear to have changed political leaders’ minds for now. Most Germans want to strengthen European solidarity, but 64 percent of them oppose joint bond issuance. And the approval ratings of Chancellor Angela Merkel and Scholz have skyrocketed since the crisis began. No German politician has forgotten that the chancellor’s 2013 eurozone rescue policy – which stopped short of eurobonds – led to the founding of the AfD as a staunchly anti-euro party.
It is possible that more German leaders will change their minds when the economic crisis fully hits home. For now, eurobonds are as toxic a topic as there could be – particularly given that there is not yet a great sense of urgency about the economic consequences of the crisis in Germany. To truly build European solidarity, the leaders of France, Spain, Italy and other member states should act more strategically, taking into account the political situation in Germany, the Netherlands, and Austria for the benefit of the entire EU. Instead of driving Germans into a corner with something that is the political equivalent of France mutualising its nuclear force de frappe or fully implementing far-reaching pension reform, they should give Berlin the opportunity to prepare its domestic politics for a massive act of solidarity. This way, they would have more chance of success.
View from Rome
European Commission President Ursula von der Leyen’s 2 April letter to Italy, published by La Repubblica, openly recognises how European countries’ initial response to the covid-19 crisis was inadequate, failing to honour the friendship that defines – or should define – their relationships with one another. The Italian government welcomed this gesture, with Prime Minister Giuseppe Conte publishing a positive response the following day.
Von der Leyen had already expressed empathy for Italy in a video message she recorded in mid-March. Yet it may be that Italy’s European partners have only realised in the last few days and weeks that the pandemic is not an exclusively Italian crisis – and that abandoning Italy would be counterproductive for Europe as a whole, both economically and politically. Such a move could supercharge the propaganda of League leader Matteo Salvini and other anti-European, populist politicians.
In a rare show of unity, Italy’s political parties have almost completely converged on the need to issue coronabonds. This is partly thanks to the support of influential former European officials such as Mario Draghi, who wrote in favour of these measures in the Financial Times. Italy has triggered an open debate on the matter, by overcoming the preliminary vetoes in the European Council. This has given Conte’s government new influence in European negotiations.
However, coronabonds could soon be the new rhetorical lens through which the Italian public view the effectiveness of all the EU’s actions (and, perhaps, its existence). The Italian government should not risk becoming a prisoner of its own slogans, but needs to look closely at the content of the crisis response measures the EU is discussing. This cautious approach will help Rome contain an economic crisis that is projected to cause a contraction of between 6 percent and 13 percent of GDP in 2020 (depending on the duration of the lockdown) – according to estimates by the Institute for Economic Research, Fitch, and Confindustria.
To make progress, Italy will have to show its European partners that it does not aim to exploit the health catastrophe to covertly mutualise its pre-crisis debts. Some Italian leaders – such as Economy Minister Roberto Gualtieri and Europe Minister Enzo Amendola, as well as EU Economy Commissioner Paolo Gentiloni – have understood this well. They seem to be trying to shift the emphasis of the European debate away from coronabonds and towards effective measures that involve few conditions, which all European governments could perceive as a victory.
Having converged on a request for true European solidarity and a call for accelerated European integration in response to the pandemic, Italian politicians now need to adopt a more realistic and less ideological approach to the crisis. In this, the Italian government should support the eurozone rescue fund proposed by Gentiloni and EU Commissioner for Internal Market and Services Thierry Breton. Conte is convinced that Italy has compromised on coronabonds as a step towards a pan-European crisis response – and he expects his counterparts in other member states to reciprocate.
View from Paris
Paris has made clear that it sees this crisis as a make-or-break moment for the EU. There are significant divisions between member states on how to handle the coronavirus and whether to mutualise debt in the eurozone. This is why France joined eight other countries – Spain, Italy, Belgium, Luxembourg, Ireland, Portugal, Greece, and Slovenia – and the European Central Bank in pushing for coronabonds.
But the proposition has met with fierce opposition from Germany and other fiscally conservative European countries, for whom even the term “coronabonds” is toxic. As a result, Paris is now proposing a third way: a fund lasting 5-10 years that would allow the EU to issue shared debt and thereby tackle the economic crisis (as reported by the Financial Times). To pay for the bonds, Paris proposes a “solidarity tax” or the use of other forms of EU-wide tax revenue that currently go straight into the bloc’s budget.
French leaders have tried to summon the painful memories of 2008-2012 to provoke a shift in fiscally conservative countries’ position. During the financial crisis and the euro crisis, France – alongside Italy – called for eurobonds, while Germany staunchly opposed the idea, urging member states to keep their finances in order. This time is different, according to Paris, in that the moral hazard argument on fiscal responsibility no longer holds: people are dying across the continent as the virus spreads everywhere. This is one of the reasons why the German refusal to move forward on coronabonds has provoked such outrage in Italy and Spain. Merkel has expressed her preference to use the ESM, but Madrid and Rome remain opposed to this, as such loans usually come with conditions such as structural economic reform. Paris is now positioning itself as a mediator in this dispute.
President Emmanuel Macron has been pushing to relaunch the European project in the past three years. He is convinced that now is the time for Europe to unite through acts of solidarity and to go beyond the historical north-south divide on economic – particularly fiscal and financial – issues. The novelty here is that his recent moves seem to have the support of the French public. A poll Viavoice conducted last month shows that an overwhelming 84 percent of respondents want the EU to relocate its supply chains from Asia to Europe, and that 70 percent believe the European integration process must gain new impetus to create a true European power.
In this sense, the covid-19 crisis will be a make-or-break moment for the EU: ongoing discussions on the future of the European project and the eurozone mirror the growing divide between those who want to act decisively and those such who fear the long-term political and institutional effects of ambitious measures such as coronabonds. These discussions are crucial in that they demonstrate the democratic ideal the EU stands for. But the longer they take, the greater danger they pose to the solidarity the union needs to demonstrate right now.
The European Council on Foreign Relations does not take collective positions. ECFR publications only represent the views of their individual authors.