Coronabonds Are Inevitable. Everybody Knows It
The founders of the euro understood that the currency would create tensions and problems leading to crises and then reforms.
(Bloomberg Opinion) -- The European Central Bank has just taken a giant step toward converting its emergency aid package of 750 billion euros ($824 billion) — dubbed the Pandemic Emergency Purchase Program — into a true no-limits bond-buying vehicle by relaxing the “issue limits” it imposes on its debt purchases related to Covid-19.
Previously, the ECB couldn’t buy more than one-third of a country’s eligible debt.
But financing the fight against the new coronavirus should not be put exclusively on the shoulders of the euro zone’s central bank. Action by European governments is necessary too.
Last week, nine euro area governments — including France, Italy and Spain — sent a letter to Charles Michel, president of the European Council, calling for the issuance of so-called “coronabonds.” These would be a common debt instrument for the single-currency bloc to raise funds in the markets to the benefit of all member states. The Germans and the Dutch are against such mutualized financing, calling the move to coronabonds premature.
But the protests of northern politicians should be taken with a large dose of salt. Europe will get coronabonds, although not before the hawkish euro states do a certain amount of shadow boxing to convince the folks back home that they’ve fought the good fight to protect their interests.
The general public in Germany, the Netherlands and other fiscally conservative member countries are opposed vehemently to mutualized debt issuance, fearing that it would encourage more “feckless” behavior from their free-spending southern cousins. So their leaders are reluctant to embrace it, except in a crisis.
So far, the ECB’s giant pandemic bond-buying spree has acted as a balm to to the European debt markets. But there’s something headed our way that might spark another outright emergency: a ruling from the German Constitutional Court in Karlsruhe due in early May. Many experts expect that the court will rule that the ECB’s Quantitative Easing program (which now includes the pandemic plan) is constitutional only with strict limitations on asset purchases.
An unfriendly verdict from the German court could blow out the spreads — the difference between southern states’ bond yields and those of benchmark German bunds — in European markets and endanger the euro. This is where coronabonds come in.
The European Stability Mechanism, the single-currency area’s rescue fund, or perhaps the EU Commission could issue the bonds. The proceeds would be distributed to member states according to a previously agreed weighting, and all the countries would be jointly and individually liable.
The purpose of a coronabond would be to transfer the burden of financing the fight against Covid-19 from the ECB to the ESM. This would get the ECB out of a business it has no business to be in, which should especially appeal to ECB hawks such as Klaas Knot of the Netherlands and Germany’s Jens Weidmann.
Nations such as Italy could raise the money they needed to fight the virus through coronabonds rather than the issuance of new national bonds, which would have to be propped up continuously by the ECB to keep interest rates from skyrocketing and strangling an already weakened state’s economy.
The new bond would allow the ECB to get out of its new no-limits bond-buying policy in a safe way, without blowing out the spreads, endangering the euro and undermining the fight against the virus. To make the German court’s decision a non-event for the markets, the euro zone governments should adopt coronabonds before the verdict is announced.
Yes, German politicians are right that the coronabond might be a stepping-stone to a full eurobond. But the remorseless march toward full monetary union works that way in Europe.
The founders of the euro understood that the currency would create tensions and problems leading to crises and then reforms. Ultimately, something approaching full monetary union would be achieved. Adoption of coronabonds would be part of that inevitable process.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Melvyn Krauss is a senior fellow at the Hoover Institution at Stanford University and an emeritus professor of economics at New York University.
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