Eurobonds or Bust? Europe Struggles to Find a Joint Approach to the Corona Catastrophe

Faced with a growing economic crisis, many European Union member states are clamoring for the introduction of so-called corona bonds. Just like it was in the euro crisis, though, Germany is opposed. In the end, Berlin may not have a choice. By DER SPIEGEL Staff
People in Naples waiting for food handouts: "Are we together or are we not?"

People in Naples waiting for food handouts: "Are we together or are we not?"


There are three recent comments that stand out for what they reveal about the state of the European Union these days. The first comes from Felipe González, a former Spanish prime minister and once a friend of former German chancellors Willy Brandt and Helmut Kohl. "If there is anybody in Europe who believes they are superior to others, they will pay dearly. Such a thing happened to us twice in the 20th century, with horrific consequences."

The second quote comes from Lars Castellucci, a member of German parliament with the Social Democrats (SPD). "Europe is in danger of becoming the most prominent corona fatality," he said. "The mood in Italy is dramatic. Russians and Chinese are being hailed as saviors. But they feel abandoned by Europe."

Finally, there's Bruno Le Maire, France's finance minister. "There is just one question: Are we together or are we not? Are we presenting a sad image to the world of a Continent divided into North and South?" Like the other two, Le Maire's musings were a not-so-hidden reference to Germany.

The Germans and Europe, that long history that has alternated between devastating wars and periods of solidarity, is beginning a new chapter. As the corona crisis tightens its grip on the Continent, hopes are being placed on the shoulders of the large, strong country in the middle. Will it be able to muster sufficient solidarity to help out the weaker EU members, particularly Italy and Spain, which have been hit so hard by the virus?

Many doubt that it can. Italy was shocked when the German government initially placed a ban on the export of personal protective equipment. China jumped into the breach. The Germans have, of course, regained a bit of standing by accepting patients from Italy and France. Mostly, though, Europe is looking to Germany for financial solidarity.

It was the same thing we saw in the euro crisis, which erupted in 2010. Back then, the German government refused to allow for eurobonds, which could have been a great help to Greece, for example. Southern European countries were furious and Nazi comparisons were aired -- not unlike the more recent strong words from González.

Unable to Find Agreement

The pressure is once again on the German government now to approve eurobonds, which have been rebranded as corona bonds. Again, Berlin is refusing. And again, Europe is presenting a rather miserable image in a difficult crisis.

The EU wasn't doing all that well even before the crisis. There were divisions between North and South, and between East and West. And there was the burgeoning renaissance of the nation-state and the return of internal borders due to the refugee crisis, not to mention a lack of clear leadership, mostly because German Chancellor Angela Merkel and French President Emmanuel Macron were unable to find agreement.

The virus has made all of that even worse. Closed borders, nation-state unilateralism, economic collapse. Everybody is following their own path, and Hungarian Prime Minister Viktor Orbán has taken advantage of the crisis to transform his country into a dictatorship. Martin Schulz, the SPD politician who used to be president of the European Parliament, responded by saying: "Orbán is a cold and calculating cynic. He is fully aware of the difficult situation in which member states and the European Union find themselves. His calculus: The Europeans don't have time to stand up to my authoritarian politics. So he has mercilessly pushed it through."

Next week, European heads of state and government may have an opportunity to send out a message of hope to the uncertain and divided EU. Once again, they are to meet up in a video conference for a summit meeting. If it goes well, they will agree on financial solidarity and will censure Orbán. If it doesn't go well, they will be unable to reach agreement and won't even address the goings on in Hungary.

Last Thursday, the summit didn't go well. The video conference lasted for six hours, during which leaders tried to find a joint response to the economic consequences of the corona crisis. One of the main topics discussed was corona bonds.

Merkel, joining the meeting from her at-home quarantine, showed her stubborn side and sang the praises of the European Stability Mechanism (ESM), the EU's bailout fund. "Don't be so critical," Merkel told Italian Prime Minister Giuseppe Conte, according to a report in the Spanish daily El Pais. "If you pin your hopes on corona bonds, they are never going to come."

Way Down on the Priority List

Spanish Prime Minister Pedro Sánchez threw his support behind his Italian counterpart, which is why there was no joint statement following the summit, just a paltry assignment for EU finance ministers to work something out. The impression left by the meeting was clear to all: "In a crisis, Europe cannot be depended on."

European Commission President Ursula von der Leyen did her best to get everyone back on the same page, but she is also having trouble finding her way in this crisis. The issues that she was hoping would define her tenure, such as the Green Deal for Europe, have fallen way down on the priority list and, just like her predecessor, she has been unable to find a convincing response to the developments in Hungary – despite it being the Commission's job to enforce European treaties.

Von der Leyen's attempt to please everybody is reaching the limits of its usefulness. At one point, she said she could envision the adoption of corona bonds, only to then highlight the liability issues associated with them and say that the term was little more than a "buzzword." She then changed her approach again after being criticized by Italian Prime Minister Conte.

Indeed, it became clear to von der Leyen that the crisis currently shaking the EU is too strong to be adequately contained by the Commission in Brussels. But who should do it instead? It is actually a task that should fall to the German chancellor, as leader of the most-populous European Union country. Furthermore, Germany is taking over the rotating Council of the European Union presidency on July 1. That will de facto make Merkel Europe's leading crisis manager. At the same time, though, Merkel is a major party in the dispute over corona bonds, on which Europe's fate seems to currently be hanging.

The problem that must be addressed is the following: There are fears that the creditworthiness of countries like Italy and Spain could sink so far that they will be unable to obtain credit from global financial markets affordably, with interest rates potentially growing ruinously high. Corona bonds, by contrast, would be joint bonds offered by all eurozone countries together, backed by financially stronger countries. Italy and Spain would suddenly no longer have trouble accessing liquidity on global markets.

During the euro crisis, there was concern that Greece, for example, had been extremely careless with its finances and had been living beyond its means. Merkel was unwilling to underwrite such behavior.

Measures to Combat the Crisis

This time, though, it's not about sharing out old sovereign debt from Italy or Spain. These countries have been hit especially hard by a pandemic that is affecting all EU member states. Yet Merkel and German Finance Minister Olaf Scholz are still clinging to the same reservations against the bonds that they had back in the euro crisis. They are afraid that the new bonds could morph into a permanent institution, despite the fact that a time limitation is part of the discussion. German negotiators in Brussels are also pointing out that no eurozone member state has yet run into difficulties on the financial markets, not even Italy.

It is a point that cannot be easily dismissed. On Wednesday, Spanish Economy Minister Nadia Calviño insisted that Spain would not have to apply for an EU bailout package because of the COVID-19 pandemic. Speaking to a Spanish radio broadcaster, she said that the country was having no difficulty obtaining financing on international markets.

German Chancellor Angela Merkel: "Don't be so critical."

German Chancellor Angela Merkel: "Don't be so critical."


Should aid become necessary, the so-called "stingy four" – as Germany, Austria, Finland and the Netherlands are sometimes referred to in Brussels – are proposing other instruments, primarily focusing on generating additional funding using more traditional methods. One idea is reassigning money from the EU budget to measures combating the crisis. The European Investment Bank is also to introduce a new program focused primarily on supporting the economies of countries that do not have their own development banks.

Merkel and Scholz, though, are pinning most of their hopes on the ESM. It has proven itself in the past, primarily by shielding Greece, Ireland, Portugal and Cyprus from insolvency.

The bailout fund currently has 410 billion euros available. The Chancellery and the Finance Ministry support the concept of using that money for cheap loans to countries in need. The advantage of this approach is that it would enable the European Central Bank to purchase unlimited amounts of sovereign bonds from these countries.

But if Italy and Spain both need help at the same time, it could quickly exhaust the funds available through the ESM. Merkel and Scholz, though, have considered that possibility and have come up with a potential solution: They would be prepared to double the size of the ESM, with Germany injecting 22 billion euros in fresh capital.

That, essentially, is the price tag Germany would face for avoiding corona bonds. France has sought to accommodate the German position and has proposed the establishment of a special fund for the period after the crisis. Finance Minister Le Maire has spoken with Olaf Scholz about the concept, but the German finance minister is skeptical.

Trapped in a Dilemma

A problem with this debate, as with the corona bond debate, is that it's not strictly about policy. Political symbolism plays a huge role as well, and eurobonds have become a symbol of European solidarity, especially in southern Europe. In the North, meanwhile, they are primarily seen as an attempt by southern European countries to take advantage of the economic strength of countries like Germany and the Netherlands.

Merkel's center-right Christian Democrats (CDU) still haven't recovered from the euro crisis and remain entrenched. "This ideological debate is completely unnecessary," says German Economy Minister Peter Altmaier, adding that the arguments against collectivized European debt haven't changed since the common currency crisis.

His position represents a broad consensus within the party. "We have to join together to lead Europe back to renewed strength," says CDU General Secretary Paul Ziemiak. "But when it comes to corona bonds, we are adamantly opposed. We are a team player, but the solution cannot be simply procuring a joint credit card. What we need in the current situation is targeted support for those countries that have been hit hardest by the coronavirus."

But German conservatives find themselves trapped in a dilemma. If they continue to be unmovable in the corona bonds debate, they will be able to say that they remained true to their convictions, but they would risk Europe's future by doing so. It was a dilemma that almost pulled the CDU apart during the euro crisis, when the conservative group in German parliament reluctantly signed on in 2015 to the final bailout package for the Greeks.

It was a traumatizing experience for the CDU, particularly against the backdrop of the 2013 founding of the AfD, which was initially a staunchly anti-euro party. There is a deep-seated fear within the CDU that the right-wing populists could benefit mightily from the introduction of corona bonds.

Yet even though the AfD's primary focus early on was eliminating the euro, the issue isn't a priority for the party's grassroots any more. AfD leader Jörg Meuthen is opposed to corona bonds, as he made clear on Facebook this week, but Meuthen himself noted that the reaction to his post was far below what he is used to. "The issue is unwieldy and requires some basic knowledge, which is something people like to avoid," he says.

"Germany Isn't an Island"

But, he adds, that's nothing new. "Ever since the refugee crisis in 2015, other things have generated more clicks – asylum or, right now, the coronavirus, for example." He says he has repeatedly floated "test balloons," but financial policy no longer stirs people up the way it once did. He says he is hoping that will change. "In the economic crisis we are currently heading for, these questions will become more pressing."

The Social Democrats are actually in favor of corona bonds, but the party is once again facing the problem that they are part of the government. Finance Minister Olaf Scholz, a senior SPD politician and Merkel's vice chancellor, is opposed to the bonds and in favor of relying on the ESM in the crisis, and the party is currently following his lead, if a bit sullenly. Yet even though party head Norbert Walter-Borjans reached agreement with Scholz that the party would fall into line on the issue, he recently told German public radio broadcaster Deutschlandfunk that corona bonds were "the correct path" – more correct than ESM bailouts.

The Green Party, meanwhile, has agreed on a common line. A "joint effort" is needed, says Robert Habeck, one of the party's two leaders. "Germany isn't an island. We can only fight a pandemic and an economic crisis on a European level. Our economy is also dependent on European economies being stabile. That is why we need European bonds."

The Greens are yearning for a second speech from Merkel, this time focusing her attentions on Europe. Essentially, they are hoping she will finally play the leadership role many would like her to play. In her first televised speech on the coronavirus, she didn't mention the word Europe even a single time.

French President Emmanuel Macron, by contrast, focused on Europe's role and responsibility in this crisis in his first speech to the country.

The French are being guided by a trio of motives at the moment. The first is Macron's long-held desire for a politically robust and sovereign Europe. The second is his conviction that this European-wide crisis cannot be overcome with national solutions. And the third is his fear of handing populists a propaganda tool should Europe fail to demonstrate solidarity with countries like Italy and Spain – and that these countries could then plunge into mass-unemployment and lasting recessions.

"We must prove to all those who have always been opposed to Europe and who have been waiting for us to fail that Europe is strong and can overcome the crisis," says French Minister for European Affairs Amélie de Montchalin. "I have the feeling that the political discussion is on the right track and I have the impression that the Germans also want to find a way out of the crisis together with us," she recently said. Still, she felt it necessary to add that Germany and the Netherlands won't be able to recover if the others aren't doing well.

"A Tragic Mistake"

Italy, for example. It has been a few days now since Carlo Calenda joined other Italian politicians in penning an open letter published in the influential German daily Frankfurter Allgemeine Zeitung. A former Italian economics minister, Calenda wrote that he still cannot understand why Italy's "dear German friends" reacted so callously to the catastrophe in his homeland.

"If Europe does not make available joint financial instruments against the pandemic, after the crisis, people will think that the European Union is useless." That could result in the impression that authoritarian countries make better partners. And that, Calenda wrote, "would be a tragic mistake."

"One or two years from now, debt levels will be far, far higher than they are today," argues economics professor Guido Tabellini of Bocconi University in Milan. "And then the debt crisis will return. That would be a disaster." We are now facing the consequences of never having followed up the currency union with a fiscal union, Tabellini says. Corona bonds would be a step in that direction, he believes.

But that isn't likely to happen, as an internal paper from the German Finance Ministry indicates. The paper was compiled in preparation for the Euro Group meeting of finance ministers from common currency member states, which is scheduled to take place next Tuesday. The focus of the meeting will be the development of financial instruments for the crisis.

"From the German government's point of view, the discussion should focus on the use of instruments for which solutions can be quickly implemented," the paper notes. That essentially excludes euro bonds, since all the legal challenges necessary for their introduction would take two years.

"The instrument catalog of the European Stability Mechanism (ESM) is available in the current crisis," the Finance Ministry paper notes. A precautionary credit line from the ESM "could contribute to stabilizing market access for individual euro zone member states to protect the financial stability of the currency union." The ESM does not require new instruments, the paper argues.

Even if that were all true, such papers are insufficient in the face of the political leadership that is now needed. If Merkel chooses to follow the line laid out in the document, then she must also hold a speech to all of Europe, similar to the address she recently held for Germans. And her message would have to be that in this crisis, Germany will demonstrate heartfelt solidarity with the rest of Europe – initially via the ESM, but should it become necessary, also with corona bonds.

And then, as part of its Council presidency, Germany could present a program described by Michael Roth, state minister for the European Union in Germany's Foreign Ministry, as follows: "Many of the problems we have had in the EU for a long time are being magnified by corona: The currency union lacks a social dimension. As such, many of the issues that we intended to pursue during our council presidency are even more urgent than before: the completion of the economic and currency unions, negotiations over a sustainable, climate-friendly EU budget, the strengthening of the rule of law in Europe, and not just in Poland and Hungary, and improved cooperation in foreign and security policy."

Regarding Hungary, Martin Schulz has a specific proposal: "I expect the EU to establish new budgetary priorities. The priority now should no longer be structural funding in Hungary, but the overcoming of the corona crisis."

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