After its COVID-19 emergency, Europe should issue joint recovery bonds
As exceptional as efforts by the European Central Bank (ECB) and European states have been at the onset of the COVID-19 pandemic, it is not too soon to think beyond the crisis. The ECB has waived its self-imposed restriction on the amount of bonds it can buy from each member state in its Pandemic Emergency Purchase Program (PEPP), signaling that it has the eurozone's back for the duration of the emergency. European leaders must now ensure that the same solidarity is adopted for the long-term economic recovery. Europe's symmetric crisis must not turn into an(other) asymmetric recovery.
Italy, for example, will find it hard to launch as large and comprehensive a post-crisis economic recovery program and fiscal stimulus as Germany will. To help all member states recover, the eurozone will need more transformative cooperation on monetary and fiscal policy, with an emphasis on introducing special joint recovery bonds.
The bailout tools used by the European Stability Mechanism (ESM), established in the crisis of a dozen years ago, are unsuited for the coming joint fiscal needs in the eurozone. Of course, such a tool as a multi-country Enhanced Conditions Credit Line (ECCL) with token country conditionality would be marginally helpful if the ESM launched one soon. (In part because of Dutch resistance, agreement on such an arrangement is being held up.) Launching a joint "corona bond" among all or some eurozone member states aiming to finance government emergency healthcare expenses, as nine eurozone leaders recently suggested, makes a lot more sense than resorting to the ESM.
But eurozone fiscal solidarity is a scarce commodity even in the midst of an unprecedented public health crisis, and it would be a waste of political capital in the eurozone to push for an ESM role, following the ECB's actions. Political stigma would likely follow any recipient of ESM funding. And with the ECB committed to open-ended bond purchases during the COVID-19 emergency, a common "corona healthcare bond" looks oddly redundant. The solidarity embodied in the ECB's jointly owned balance sheet already covers such member state expenses. EU leaders should instead let the ECB do its "crisis job" and shift focus to the post-COVID-19 recovery and Europe's long-term priorities. This should be the "further inclusive actions" that the EU Council has requested be designed in the coming days.
Were the eurozone or European Union as a whole to come together instead and launch a "European COVID-19 Investment Recovery Bond" (ECIRB), the long-term economic impact in and political coherence of the region would be brighter. European interest rates will be extremely low for a long time, so it is time for EU leaders to think big. ECIRBs would be very long (30-to-50 year) maturity bonds issued by a European institution, such as the ESM if only for the eurozone, or the European Commission or European Investment Bank for the entire European Union. They would be backed by the joint capital of the institution in question. An additional member state resource commitment to the European Commission budget would be required, however, and ECIRBs would be eligible for purchase by the ECB. Over time, ECIRBs would be repaid using the tax proceeds from the additional economic activity they generate across the participating member states.
The amount of ECIRBs would have to be big enough to help the entire eurozone or European Union during a multi-year recovery period and politically signify "COVID-19 fiscal solidarity." A minimum of 2 to 3 percent of eurozone or EU GDP over a two- to three-year time horizon, following the end of COVID-19 quarantine measures—i.e., around €1 trillion—seems appropriate.
Maintaining momentum for Europe's existing pre-pandemic long-term political and economic priorities will be paramount in the post-COVID-19 recovery. Functionally, such joint European economic recovery bonds would fund predominantly joint European infrastructure projects across all member states (without member state cofinancing) in already agreed European priority areas. These should include decarbonization and digital infrastructure. A smaller share of bond revenues would also be made directly available to member states' governments to help them boost high fiscal multiplier domestic public investment levels after the end of the COVID-19 quarantines.
Big decisions in Europe always require the political pressure only an economic or political emergency can provide, making it imperative that EU leaders agree to ECIRBs for the post-crisis period now. The lack of uniform quarantine protocols among member states similarly dictates EU leaders move quickly to discourage those facing financial pressures to reopen their domestic commercial activities earlier than the scientific evidence warrants.
ECIRBs would be a tangible manifestation of European fiscal solidarity and a post-crisis complement to the ECB's forceful immediate interventions. Issuing such joint recovery bonds would be another example of a "Hamiltonian response" in Europe—an attempt to share the costs of economic and political challenges experienced by all Europeans, comparable to what the states achieved in 1790 with the adoption of the US Constitution. And these bonds would do so in a targeted, timely, finite, and politically accountable way that conforms with Europe's long-term challenges and should find broad political support in all member states.