Coronabonds and the idea of European financial unity
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Italian Prime Minister Guiseppe Conte:
"What do we want to do in Europe? Does each member state want to go its own way?" he asked in a televized interview on Tuesday evening, pointing to the huge aid package of $2 trillion the US is using to respond to its own coronavirus crisis.
"If the response is not a common, serious and coordinated response, Europe will become less and less competitive, including in the global market," said Conte. And German taxpayers shouldn't be afraid. Coronabonds did not mean that the Germans "had to pay even a single euro for Italian debt."
During the euro debt crisis around a decade ago, the German government could be sure that most of the leading economists shared their rejection of eurobonds. Now in the coronavirus crisis this is no longer the case.
Seven prominent economists including Michael Hüther, head of the Institute of German Economics (IW), Peter Bofinger, and Gabriel Felbermayr, head of the Kiel Institute for World Economy (IfW), are now drumming publicly for coronabonds.
"The strong have to help the weak. Now is the time when the much-praised community with a common destiny has to show its true colors," wrote the economists in an article that appeared in five European newspapers simultaneously.
Borrowing together 1 trillion euros would be "a clear sign that Europe is in a crisis together." The signal could not be missed. Not a single overwhelmed country would have to apply by itself. "Europeans manage the crisis together," wrote the economists.
...The decisive difference for Hüther is that coronabonds are not permanent, but a one-off solution. There is even a historical example for this, he says. In 1975, the European Community issued a bond to mitigate the effects of the oil price shock. "That was apparently not a problem at the time, why can't we do that in this crisis too?" he asked.
He sees coronabonds as a "litmus test for European solidarity." All countries that are doing badly wonder who is going to help them. "In the end, if it's just the Chinese or maybe the Russians, then I think the breakup of the European Union will be unstoppable." And that cannot be in the interest of the German economy.
"If we don't stabilize Europe, our markets won't be there either," he concluded.
I wonder what the problem is if the german taxpayer won't end up having to pay italian debt?
It is tricky as always.
They set up the ESM in the aftermath of the 2008 crisis which basically guarantees the debt that a country would take. There is still EUR0.5 trillion left that can be used.
The country would be responsible for the debt, the ESM only a guarantor. Using the ESM, the interest rate can be held low and it attracts investors to buy the said country's debt bonds.
In turn, Coronabonds would be issued directly by the EU, meaning that all would shoulder it together.
Conte was offered to use the ESM and he refused, knowing well that Italy has already a massive amount of debt. So for him, it would be "nicer" if all EU countries carry the extra borrowing and the Italians can carry on splashing around with the cash as they have always done.