“If there is ever a time when solidarity must arise, that day is today”, Much more than in the crisis that in the last decade has affected the most vulnerable economies in the euro area. Holger Schmieding, a German in London, chief economist at Berenberg Bank, warns that the way Europe responds to the “acute emergency” that the coronavirus originated will “mark, for a long time, people’s perception”In relation to the advantages of belonging to the eurozone and, fundamentally, regarding confidence in the European project. In order not to take this “dangerous” risk, argues the economist, European leaders have to “break taboos” like that of joint debt issuance – at eurobonds (a proposal that, in this case, is being called coronabonds) – but a step in that direction seems to be anything but imminent.
Assuming that Covid-19’s epidemiological trajectory will take a more favorable turn – this will happen in the coming weeks or months – what will remain in the history of this crisis in Europe is the way “Europeans helped each other others in this emergency ”. “This is what will define what Europe is, in the end, and that brand will last a long time”, Writes the German economist in an analysis note released this week. “If it is clear that there is a well-managed solidarity, in an emergency situation like this, it will help to combat the narrative of“my country first ”, only then the others. On the other hand, if the absence of solidarity becomes clear, “this could create a risk of dangerous Euroscepticism”.
In a recently amputated European Union of one of its historic members, the United Kingdom, the deadly impact of the virus is being felt most severely in Italy and Spain, two large countries that were already experiencing very uncertain economic and political contexts, which aggravates political risks. With the restriction measures and their impact on economies, as well as the overload of the health and social security systems, “all European countries will have to finance huge public deficits in a year in which GDP (gross domestic product) could fall by 5% or more – in Spain, Italy and some other countries, GDP could fall by another 10% ”, says Berenberg Bank.
Countries need not only to find ways to respond to this unexpected crisis, but also to have the resources to prepare for the post-pandemic – this will be decisive in ensuring a “V recovery” and not a period of near stagnation after the shock (an illustrated risk by economists with an “L”).
If each country has to finance these deficits by its own means, in isolation, the same type of interest rate the same kind of negative spiral that has already manifested itself in the debt crisis. That is, countries with greater borrowing needs are therefore demanding higher interest rates – and because they have to pay higher interest rates, their public accounts are under more pressure, leading investors to become even more afraid to ask for higher interest rates, and so on. Conversely, there are phenomena of investors’ refuge from countries seen as safer, making these countries benefit from increasingly lower financing costs.
At eurobonds they would be a way to try to avoid this negative spiral, although it is easy to see how they would tread the risk that prohibits the sharing of financial responsibilities between European countries. But this being a singular and temporary emergency, the issue of joint debt would, in practice, involve the creation of a “special purpose vehicle”- a kind of closed-end fund with the capacity to go to the markets to seek money – with a framework of, for example, 500 billion euros. This fund would be financed at very low cost to investors, as it benefits from the general European guarantee, including from Germany, and could then be used by countries that need some of that money and that find it cheaper there than us. markets, in exchange for a merely symbolic interest rate.