Euro Corona bonds – Everything you need to know
The euro (EUR) has fallen against the British pound (GBP) as a result of renewed UK economic optimism and the continued successful vaccination rollout. Sterling recovered last week’s losses, with the British pound to euro (GBP/EUR) exchange rate now standing at EUR 1.16.
As the EU continues to navigate the economy amid the coronavirus pandemic, last year saw the concept of Corona bonds discussed and backed by several Eurozone countries as a possible resolution to alleviate EU financial struggles. However, the idea received mixed responses amongst the EU. Here we explore what Corona bonds are, the EU dispute and the future for Corona bonds.
Explanation of Corona bonds
The concept of Corona bonds was a collective debt amongst EU member states, with the aim of providing financial relief to Eurozone countries battered by the coronavirus. The funds would have been mutualised and supplied by the European Investment Bank, with the debt taken collectively by all member states of the European Union.
The Corona bonds dispute
The idea of Corona bonds received reinforcement from nine EU countries, all keen to reach a financial solution as soon as possible. The countries in favour of Corona bonds included:
However, there was also steep opposition to the idea of Corona bonds. The resistance came most notably from the ‘Frugal Four’, which consist of:
- The Netherlands
The countries have earned this title due to their shared opinions on collective debt and united views on fiscal issues.
The concept of sharing debt has always been a controversial subject for the ‘Frugal Four‘. Proposals concerning the issuing of common bonds have previously been a divisive conversation amongst EU members. The discussion will undoubtedly open up old wounds within the EU.
A previous instance of such deliberation was during the 2010-2012 sovereign debt crisis. Both France and Italy supported the idea of issuing collective ‘Eurobonds’, much to the resistance of Germany.
Germany is very much of the opinion that finance is an individual nation’s responsibility. They believe that each EU member state should keep their finances in order.
Italy’s former Prime Minister, Giuseppe Conte, was particularly discouraged by Germany and the Netherlands’ opposition to Corona bonds.
He stated that the EU “needed to react with innovative financial tools” and issued an ultimatum.
The pros and cons of Corona bonds
The idea of fiscal unity amongst nations seems a beneficial and supportive concept. Whether this is something that could work in practice, remains to be seen.
The advantage of Corona bonds is that they would allow European countries to gain essential financial support. States could receive economic aid without expanding their national debt.
If the EU member states were able to show a display of unity, this would likely strengthen confidence amongst Europe. It’s no coincidence that the euro (EUR) began to decline as hostility grew amongst the EU.
A disadvantage of Corona bonds is that they would not necessarily enhance debt sustainability. The concept would only aid future debt forgiveness, having to distinguish between coronavirus related debt and legacy debt.
The implementation of a common bond amongst EU member states could also potentially take a considerable amount of time. The delay is not ideal for countries that require access to funds immediately.
WHAT WAS THE OUTCOME OF CORONA BOND DISCUSSION?
Unsurprisingly, Corona bonds did not see fruition last year due to the significant amount of disagreement amongst EU states. European Commission chief Ursula von der Leyen, argued that EU member states were more concerned with themselves during the coronavirus crisis and not the Eurozone as a collective unit.
“In the face of needing a common European response; too many have thought only of their home problems,” she said.
She attempted to outline solutions during her announcement but with no mention of Corona bonds. Von der Leyen revealed that 100 billion euros would go to countries that have been hit the hardest by the virus, with the funds helping to compensate for reductions in wages for workers on shorter hours.
EU leaders continued to discuss Corona bond options throughout 2020 but failed to reach a unified solution. Other options which were also suggested at the time included European Stability Mechanism (ESM) loans, which also faced rejection from the likes of Italy, not wanting to appear vulnerable in the markets and viewing them as just a temporary measure.
In July last year, it was agreed that European Sovereign bonds would be issued to EUR member states, totalling EUR 750 billion.