The analysis shows that the debate on this new variation of eurobonds mixes two issues. On the one hand, there is the aim of providing emergency liquidity to cope with the acute crisis. On the other hand, Europe must find a long-term solution for euro states that are excessively indebted as a result of the coronavirus recession and a high debt level before the crisis. While an ESM credit line can effectively provide liquidity in the acute phase of the crisis, it does not yet include a general decision on how to deal with heavily indebted countries in the long run. According to the expert brief, the case is different with corona bonds, as joint liability and the intended strong preferential treatment of highly indebted countries practically involves the establishment of a transfer system.
The ZEW expert brief argues that the acute crisis phase is not the right time to solve the issue of excessive government debt. In the long term, various alternatives for transfers are possible here, but these would be prematurely excluded if corona bonds were introduced. For example, in the future investors could share the costs of consolidation by debt haircuts. Likewise, particularly wealthy groups of society in heavily indebted countries could be called upon to make special financial sacrifices. Since such decisions are complex and require a stable market environment, now is the wrong time to make them.
Corona bonds increase risk of debt transfers in the euro area
The issuance of corona bonds could even damage the reputation of highly indebted euro states and further destabilize a country like Italy amid the crisis. They would signal that the national debts of these countries are at risk of default and therefore new higher-ranking securities with comprehensive guarantees from the EU are required. It is also unlikely that the initially planned issuance volumes of these new bonds would suffice. This could lead to a predicament in which a fast-growing part of the national debt would have to be communitised.
The joint liability for corona bonds would thus, in the middle of the acute phase of the crisis, set a premature course that relies too one-sidedly on transfers to solve the problem of excessive debt in euro states.
“At present, the aim is to contain the COVID-19 pandemic, stabilize the economy in the short term and keep the euro states financially liquid. This is precisely where the ESM can make a valuable contribution. Corona bonds, on the other hand, do not provide any discernible added value. They do, however, increase the risk that a non-transparent decision is taken that leads to a comprehensive bailout of national public debt in the eurozone,” concludes Friedrich Heinemann.