North-South Divide Calls for Corona Bonds Met with Familiar "Nein"

The danger of a new euro crisis is growing. Weak member states like Italy need help if they're going to survive the coronavirus lockdown financially. But the call for euro bonds has been met with stiff resistance -- especially from the Germans.
Foto: Sébastien Thibault / DER SPIEGEL

On Monday, Adrio Pierantoni wanted to know what the government could do for him. Like almost all Italian companies that don't produce medicine or food, Pierantoni was forced to close his small shop in the town of Fano on the Adriatic coast. It was the latest in a series of measures designed to contain the outbreak of the coronavirus, measures that have brought the Italian economy to a standstill.

Pierantoni crunched the numbers. He calculated his missing sales, his outstanding loans, the difficult situation for his employees and suppliers -- and called his tax adviser. "We just wanted to ask how much support we could count on," he says. He didn't have to wait long for an answer. Pierantoni could theoretically expect to receive 600 euros ($660) once the forms finally arrived. His company, on the other hand, would get nothing.

Pierantoni's company, Zeppelin, has been around for more than 20 years. It makes tailor-made furniture for Milanese furniture stores. The company is healthy. Normally it wouldn't need any help from the state. But closed stores don't need furniture, which is why Pierantoni urgently needs money. "Six hundred euros wouldn't even pay the electricity bill now," he says.

The entrepreneur often finds himself looking to Germany these days. He runs the company with his wife Gabi, a German from the southern town of Rastatt. They met through a sister-city program. Germany is also home to important customers and business partners of Zeppelin's -- as well as politicians who pass laws that Pierantoni would like to see Italy adopt. Things like protective economic measures, relief funds and billion-euro bailouts. As for the number of people infected with coronavirus, Pierantoni believes Germany is two weeks behind Italy. But as far as subsidies for the economy are concerned, "it's months ahead of us."

Two Very Different Approaches

Pierantoni gets to see first-hand how the two countries are dealing with the economic consequences of the coronavirus. Or rather, how they're able to deal with the crisis.



The article you are reading originally appeared in German in issue 14/2020 (March 28, 2020) of DER SPIEGEL.

In Germany, money seems to be no object. On Wednesday, German lawmakers passed a supplementary budget of 156 billion euros to mitigate the shock to the country's economy. In total, the German government will provide economic aid worth 1.8 trillion euros.

Italy doesn't have these kinds of options. The country's debt load is 130 percent greater than its gross domestic product (GDP). Its financial leeway is limited.

The European Commission has waived all debt requirements for member states so that national governments can borrow at will. But this will only work as long as creditors are willing to lend money to countries at reasonable rates.

Italy, as well as France, Spain and Portugal, could soon reach their limits. In view of the heavy burdens that will be placed on countries, doubts in the markets are likely to grow as to whether they'll ever be able to repay their debts. This same fear took hold of the financial markets after the collapse of Lehman Brothers. It nearly destroyed the currency union.

At the time, investors speculated against highly indebted countries like Greece, which in turn made it unbearably expensive for Athens to borrow money. Only a massive intervention by the European Central Bank (ECB) calmed things down. At least until now.

The shock of the coronavirus has the potential to upend this hard-won calm. And it's hitting economies that are weaker than they have ever been since World War II.

A 'Fateful Challenge for All Humankind'

In order to pacify financial markets, the ECB has already said it would spend 750 billion euros on all sorts of bonds. But even that won't be enough, according to ECB President Christine Lagarde. Eurozone member states also have a duty to help, she says -- and not just individually, but together.

Lagarde is lobbying heads of governments and finance ministers to adopt an instrument that had been discussed during the euro crisis: euro bonds. Or as they're being called nowadays: corona bonds. The names may differ, but the principle is the same: bonds that are collectively issued by all eurozone countries. They would have the advantage of being considered safe investments, since states with good reputations like Germany, the Netherlands and Austria would be liable for less solid countries like Italy or Greece. But this is precisely why the northern member states have always been opposed to such bonds. They don't want to be on the hook for commitments that other governments may take lightly.

Even at the height of the euro crisis, the German government rejected the communitization of national debt. Among German voters, the aid programs for Greece, a relatively small country, were already highly unpopular. There would be no euro bonds "as long as I live," German Chancellor Angela Merkel assured her party's former coalition partner, the neoliberal Free Democrats, at the time.

But the coronavirus isn't Lehman Brothers. This time, it's not about countries that have lived beyond their means. It is an exogenous shock that has hit everyone. On top of the thousands of deaths, health-care systems are collapsing. Entire economies have ground to a halt. German Finance Minister Olaf Scholz spoke of a "fateful challenge for all humankind."

A 'Social Slaughterhouse'

This is especially true for Italy. The administration of Prime Minister Giuseppe Conte has uncompromisingly halted the country's economy. For more than two weeks now, the retail and dining sectors have been completely shut down. Only supermarkets and pharmacies are open. A few days ago, Rome formally declared an emergency stop for the entire economy. From Turin to Palermo, production will be halted until April 3. Only companies deemed essential to maintaining the country's food supply, like the pasta maker Barilla, will be allowed to keep working.

And the situation is only getting worse. Workers and employees in "essential" industries fear for their health. Unions are threatening strikes in order to force closures. Meanwhile, it is unclear how long Italy's network of gas stations will be able to continue operating. There's a shortage of 100,000 protective masks and gloves for gas station employees. Many operators want to close down because their turnover isn't high enough. But how are necessary transports supposed to take place without a reliable supply of fuel?

The Italian government has promised that no one should lose their job because of the coronavirus. Rome passed an initial aid package ("Cura Italia") worth 25 billion euros on March 17. The money is intended to stabilize the health-care sector and prop up small and medium-sized companies.

A second tranche of at least another 25 billion euros is to follow in April. The epidemic must not turn the country into a "social slaughterhouse," says Italian Finance Minister Roberto Gualtieri. He wants to increase the country's deficit even more. Then, he says, the inevitable recession would be "difficult but manageable."

But without the help of the ECB and the other euro countries, such a maneuver would likely be doomed to failure.

North vs. South

Many economists consider euro bonds to be the best way to share the burden of the current crisis. "The strong must help the weak," seven well-known German economists wrote in an op-ed in a leading German newspaper. They proposed as a one-off measure issuing a trillion euros worth of communitized bonds. Member states could then help themselves to the pool of money "should they lose access to capital markets."

The ECB's Governing Council, the bank's highest decisionmaking body, agrees unanimously on this. Even Jens Weidmann, the head of Germany's central bank, the Bundesbank, has abandoned his skeptical stance toward communitized debt. Like Lagarde, he has advised the German government to give up its resistance. The central bankers consider the current crisis to be far more serious than in 2008, when the financial crisis first began, or in 2012, when the euro crisis peaked. And they don't want to be the only ones battling the crisis on a European level.

Still, the German government would prefer to avoid a repeat of the debate over common debt at all costs. "It's a stillbirth," the German Finance Ministry has stated. The Dutch, Austrians and Finns similarly reject the proposal. Euro bonds are superfluous, they argue. There are plenty of other measures to save Italy and other weaker countries.

Just as it was during the euro crisis, Europe is again divided along north-south lines. During a eurogroup video conference on Tuesday, this conflict was all too obvious. The finance ministers had intended to send a strong signal of unity ahead of the (likewise virtual) EU summit on Thursday afternoon. But in the end, they didn't even issue a joint final declaration.

Italy, France and other southern European countries are calling for corona bonds or some other, similar European debt instruments in order to finance loans for euro-zone countries. The leaders of France, Spain and another seven EU countries sent a letter to European Council President Charles Michel on Wednesday. The European Union should "explore other tools like a specific funding for corona-related spending in the EU budget" for 2020 and 2021, the letter read.

French Pleas Met With Familiar 'Nein'

The European Commission also raised the prospect of such a tool last week. The body said it wanted to take out its own loans, initially only worth between 18 and 25 billion euros, in order to support national unemployment insurances. The bonds to finance the loans would be, in effect, euro bonds.

The Commission would like to issue more such bonds, but it can only borrow a limited amount of money without member states stepping in to provide guarantees. That would be a first step toward euro bonds on a much larger scale. The problem is that each of the member states' national parliaments would have to sign off on the communitized debt individually.

The Netherlands and Germany have so far rejected the idea out of hand. But France refuses to let go of the idea of issuing corona bonds or some other form of common debt. "We want to work on a common debt instrument at the European level," says French Finance Minister Bruno Le Maire. "The new measures would enable us to make the long-term investments, together, for the benefit of all member states, that will be necessary to get us out of this crisis. Europe must respond in a unified way to ensure the fastest-possible recovery for all of our economies."

The German government, however, prefers another solution: Germany's Finance Ministry says unhindered and undiminished access to the ECB's toolbox is much more important than cheaper loans.

This includes an instrument from the European Stability Mechanism (ESM) backstop fund, which still has over 410 billion euros in unused aid, called the preventative credit line. This comes in two versions: one without any restrictions and one with only slight ones.

The second version is now being discussed. Countries whose economies are hampered by the crisis would be allowed to borrow up to 2 percent of their GDP from the ESM.

This version also has another advantage. The ECB would be allowed to buy up an unlimited number of government bonds from these countries. This was the point of the so-called Outright Monetary Transactions program, which was created after former ECB President Mario Draghi's legendary "Whatever it takes" speech. It allows the ECB to make unlimited purchases of a euro-zone country's government bonds. So far, it has never been used. Its mere existence was enough to intimidate speculators.

Euro Bonds in All but Name

The Dutch, however, are still opposed to activating the ESM right now. Those reserves were created with a specific purpose in mind, they argue. They were intended to help countries that were no longer able to finance themselves on the bond markets in times of crisis. Currently, no EU country finds itself in that situation. "This is money that we can only spend once," warns Dutch Finance Minister Wopke Hoekstra. "We don't know what is ahead of us." At the same time, this also means nothing can be ruled out in the long run.

Christian Kastrop, the director of the "Future of Europe" program at the Bertelsmann Foundation, believes that eventually there will be no way around debt communization in one form or another. He says it's the right thing to do, too: "This crisis is simply too great for Europeans to deal with using traditional instruments."

Kastrop sees two possibilities for the moment. "Either the member states issue community bonds, sharing volume and risk. Or the ECB will become a real buyer of last resort."

To that end, the central bank would have to be allowed to make its own decisions, at any time and without reservation, to buy unlimited bonds from its member states regardless of their financial situation. "Then every bond would be a euro bond," Kastrop explains, "because all euro member states share the liability for the ECB."

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