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Corona bonds: an idea that cannot be contained

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By Lewis McLellan, Tyler Davies
26 Mar 2020

‘Corona bonds’ have been talked up so much that the EU risks underwhelming the market by failing to act. It has become a question of political solidarity within the region, not simply one of debt management.

EU finance ministers made a big breakthrough at their meeting this week.

By agreeing to establish a European Stability Mechanism credit line to finance the bloc’s response to the coronavirus pandemic, they opened the way to unlocking Outright Monetary Transactions.

The ECB then followed up by removing the issuer limits from its emergency purchase programme.

But persistent calls for the EU to come together to issue “corona bonds” as a joint fiscal response arguably overshadowed the measures.

The feeling in large parts of Europe is that joint and several liability is the only appropriate response to a crisis shared jointly and severally.

Because of political opposition in northern Europe, any agreement on corona bonds will never match pre-existing proposals for an EU safe asset and may end up being not as powerful as the ECB’s existing tools.

But while the ECB can do a great deal to keep borrowing costs in check, it would send a powerful message of unity to mutualise the cost of responding to this crisis.

Failing to do so would send an equally powerful message: Europe’s nations stand alone. Given the letter from the nine Eurogroup ministers agitating for a common debt instrument, failure to agree on one now would be a serious blow to European unity and would surely be reflected in borrowing costs.

If the periphery is left to fend for itself, coronavirus will make debt sustainability a problem sooner rather than later. At that point, Europe will have to foot the bill, but the damage will already have been done.

By Lewis McLellan, Tyler Davies
26 Mar 2020