No Coronabonds: Eurozone agrees on new stimulus pack

May 8, 2020

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What's going on here?

On 10 April 2020 the EU agreed on three economic relief measures. The agreement comes after heated discussions over the issuance of “coronabonds”.

What does this mean?

The measures adopted include:

  • A  €240bn credit line provided by the European Stability Mechanism (ESM). Eurogroup countries will be allowed to borrow 2% of their GDP for medical expenses;
  • A €100bn initiative to combat unemployment;
  • An additional €100 bn added to the lending capacity of the European Investment Bank.

The agreement does not include the so-called “coronabonds” after the proposal faced severe criticism from the Netherlands, Germany and Austria. The coronabonds, an initiative spearheaded by Italy, were supposed to combine securities (financial instruments that hold monetary value, in this case bonds) from more Eurozone countries in a common financial instrument. The aim was to spread the debt across the Eurogroup to help the countries hit harder by the coronavirus.

The proposal created disagreement between the Southern and the Northern members of the Eurogroup. The Netherlands was the most vocal critic. Its criticism stemmed from the fear that the initiative would force Dutch taxpayers to incur high costs of debt for economies such as Italy and Spain that were “ill-prepared” to face a crisis.

What's the big picture effect?

The recent tensions highlight three dangerous trends for the future of the Eurozone;

Firstly, they confirm that the North-South divide is as present as ever. The  Netherlands’ current rhetoric echoes the same concerns that have prompted the UK to depart from the EU. Losing national sovereignty and paying too much for other countries were the main themes. After Brexit, the Netherlands has become the lead fiscally conservative country, advocating for low debt and minimal government spending. It has also been resisting any hint of further economic integration.

Secondly, the tensions increase the risk of a powerful populist resurgence. Given the reluctance to help, Southern countries could reasonably ask themselves: “what’s in it for me?”. If they perceive the bloc as not doing enough for them in times of need, far-right parties could gain more traction. A similar phenomenon happened after the 2010-2012 debt crisis, leading to populist parties in these countries becoming more mainstream.

Finally, a more fundamental question has arisen about the sustainability of the Eurozone. Some are considering if it is possible for economies as different as Italy and the Netherlands to coexist in the same currency union. This pushes the limits of an already weakened EU even further. Even pro-EU leaders, such as Emmanuel Macron have warned that the viability of the European project itself is threatened.

Report written by Bogdan Ciacli

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