Coronabonds: An Excuse for Fiscal Irresponsibility
17 de abril de 2020

The term «Eurobond» is not new. In fact, in 2011 (in the midst of a recession after the bursting of the bubble), the European states most affected by the crisis (Spain, Portugal, Ireland and Greece) defended that instead of assuming the debt individually, it should be issued by the European Union (EU), thereby creating a larger, joint debt. The European Commission considered this possibility, but it was killed after both Germany and the Netherlands refused.

The concept of “coronabonds,” or the adaptation of the “Eurobond” to the coronavirus crisis, has undoubtedly become one of the central themes in current European debate. They have increased their popularity because they are being touted by their defenders as a plausible way to finance the enormous public spending derived from the pandemic, as well as the strengthening of the principle of solidarity between member states that should in theory characterize the EU.

However, this mechanism to finance reconstruction would materialize in a chain of perverse incentives in which the total debt of the Eurozone would end up counterproductively skyrocketing, on top of the fact that those bonds would not have a AAA credit rating. However, rejecting the Coronabonds does not necessarily imply ignoring the principle of solidarity inherent in the nature of the EU, given the existence of a multitude of mechanisms that are do not engage in debt mutualization like Coronabonds do.

Thus, by virtue of the Coronabonds, the final amount of public debt resulting from the fight against COVID-19 would be distributed among all member states, until it became socialized in order to help those most affected (among them, Spain). In short, this is really an issue of the socialization of debt. What does this arrangement imply? There would be a benefit to those who are indebted up to their neck and a detriment to those who control their debt. It is simply a real-life application of the fable of the cicada and the ant.

The total EU debt is 79.29% of GDP. Several countries surpass this figure, like Spain (95.50%), Italy (134.80%), Greece (181.20%) and France (98.40%). Some countries fall below, like Germany (61.90%), the Netherlands (52.40%), Denmark (34.20%) and Sweden (38.80%) among others. As for the deficit, it should not be surprising that the first group has budget deficits (Spain with the third highest in the EU, only behind Cyprus and Romania), while the second group has budget surpluses.

Benefiting the most indebted states at the cost of harming those that have best demonstrated how to balance their budgets can be a perverse incentive for those countries to not do so in the future. It would also discourage countries like Spain that need reform from cleaning up their spending accounts once and for all. The Spanish balance sheet, with or without the effects of the coronavirus, will not cease to be negative if the necessary structural reforms are not implemented.

On the other hand, the mutualization of debt would imply opening a kind of tailor’s box, where an unorganized group of miscellaneous public expenditures that governments approve supposedly dedicated to «fighting the coronavirus» would be allowed to manifest. The administration of the Ministry of Social Rights and the 2030 Agenda is already studying the possible implementation of a universal basic income (UBI) or a minimum living wage. Would the enormous expense derived from this hypothetical measure be considered as “an extraordinary expense for the COVID-19 fight”? It is very naive to think that countries that have not even begun to propose the possibility of applying a basic income to their own population will finance those policies in Spain.

Similarly, it could also be debated whether Northern Europe should cover our spending to fight the coronavirus for the duration of the health crisis and/or the necessary subsequent reconstruction. And on top of that, we must also consider the current situation, where Spain that shows year after year that it neither has, nor seems to want, the will to implement structural reforms to balance its spending accounts.

Many appeal to the principle of solidarity between European states. However, for this principle to exist in reality, there must also be responsibility. And it is precisely the absence of conditionality inherent in the mutualization of debt that diminishes that possibility.

Furthermore, the fundamental principle of solidarity between the different members of the EU has in the past led to the creation of various mechanisms applicable to situations like this. An easy example is that of the European Stability Mechanism (ESM), which was established in 2011 to grant loans (financed by the issuance of bonds and bills in the financial markets) to states that show initiative in requesting them. And what is asked for in exchange for these loans? Reform, audits, and strict conditions focused on avoiding future fiscal irresponsibility. And this fiscal irresponsibility is precisely what it seems like the Spanish government does not want to correct, given its request for a credit line without conditions or requirements to adjust and reform.

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