Eurobonds and the EU’s green recovery plan: a game changer?

Eurobonds and the lack of a serious EU budget have long been considered the weakest link in the EU project. This is why the debate about Coronabonds (or Recovery bonds or Eurobonds or Unity bonds, all names for a form of European debt mutualisation) has rocked the Union and may well determine its future.

Because of the opposition of a number of countries (namely the Netherlands, Finland, Germany and Austria), Eurobonds have been taboo for 20 years and when nine member states (including France, Italy and Spain) asked for them again in recent weeks, initially a loud ‘nein’/‘nee’ echoed from Berlin and the Hague and the discussion stalled.

That’s not to say nothing happened entre temps. The European Central Bank has been tasked to support ailing markets, the European Investment Bank to issue more bonds to support SMEs and the European Commission is working on a temporary unemployment scheme. And then there’s the European Stability Mechanism, the only substantial pot of EU money (over €400 billion) that has been ‘committed’ to address the health crisis.

But the wheels of history kept turning. The magnitude of the economic shock that awaits us is slowly dawning on decision makers. Meanwhile, civil society’s appeals for debt mutualisation have been blossoming right, left and center (including in the environmental community). Then France’s President Macron compared the lack of Eurobonds to the post-WWI reparations inflicted on Germany, that led to the rise of Hitler and WWII. Not very subtle.

Macron then made a very reasonable proposal. Essentially, a clone to create another European Stability Mechanism but this time designed to reboot the economy. The basic principle is that EU countries pool money and guarantees in a Special Purpose Vehicle and use it to issue AAA (cheap) new debt for whoever needs it.

But then the unimaginable happened. First, Commission president Ursula von der Leyen announced to the European Parliament that Eurobonds are a good thing, but that the right way to do them is by leveraging the EU budget. Soon after that Angela Merkel appeared to open the door to exactly that.

Why is this so important? First, using the EU budget as a collateral for new debt issued by the European Commission would enable an increase of Brussels’ spending power by five, 10 or even 20 times. €150 billion (the EU’s yearly budget) is not a lot of money to share among 27 member states, but it’s a lot of money if it becomes the debt servicing cost of €1,500 billion of new debt/investments for the next 10 years.

Second, the achilles heel of the Commission’s green recovery ambitions was always a lack of real money. Yes, the EU could (and should) steer national aid packages in a green direction. But with this new mechanism, all of a sudden huge amounts of new money would become available to really reboot Europe. Enough to lay cables for high-speed internet and a fast-charging network for electric vehicles from Stockholm to Palermo. Enough cash to convert Europe’s coal into windmill and solar panels. Or at least to get started.

The above is, of course, an extreme example. But if EU countries could accept to dedicate a part of the EU budget to service new debt, the EU could raise the funds needed to overcome the current crisis and achieve the European Green Deal’s goals. The radical difference with the French option is that these bonds would not require new cash pooling or new guarantees. And that the loans would be repaid by the EU budget, not the individual lenders. That is not a small difference.

Of course, all spending would have to go through EU programmes but it would represent an innovation, the likes of which we haven’t seen since the creation of the single currency or the ECB’s “we’ll do whatever it takes” quantitative easing programme.