Social Europe

  • EU Forward Project
  • YouTube
  • Podcast
  • Books
  • Newsletter
  • Membership

EUR-bonds in the corona crisis and beyond

Thomas Theobald and Silke Tober 10th April 2020

Eurobonds are needed to anchor macroeconomic stability and offer a safe path out of the coronavirus storm.

EUR-bonds
Silke Tober

The abrupt increase in sovereign-yield differentials amid the escalating Covid-19 crisis in mid-March served as a stark reminder of the vulnerabilities of the euro area. Within just a few days, the spread between ten-year Italian and German sovereign bonds climbed to 2.8 percentage points, while the Greek spread jumped to 4.1 points.

In crisis times like these, sovereign debt is of pivotal importance as safe assets. Due to their countercyclical price movement, safe sovereign bonds serve as an anchor of macroeconomic stability. In an economic downturn or after an exogenous shock, a flight to safety increases the price of these bonds, simultaneously lowering their yield. The lower financing costs increase the fiscal space, while the higher price improves the banking system’s balance sheets.

EUR-bonds
Thomas Theobald

If, however, government bonds are not perceived as safe assets—because investors expect payment difficulties or even default down the road—an exogenous shock such as the coronavirus may lead to capital flight from the respective sovereign debt, thereby increasing financing costs and feeding the financial ‘doom loop’ between the banks and the state.

It is debatable whether the president of the European Central Bank, Christine Lagarde, acted wisely when she said that ‘we are not here to close spreads … there are other actors to actually deal with those issues’. Yet, despite the unfortunate timing, she raised a valid point: it was the responsibility of governments in 2010 to dispel fears of a Greek default and it is their responsibility to have each other’s back in today’s crisis. In the same vein, Lagarde called upon euro-area governments to act and issue eurobonds, a demand also formulated by groups of economists on March 20th and March 21st, as well as by nine of the 19 euro-area governments on March 26th.

Signal of determination

By implementing the €750 billion Pandemic Emergency Purchase Programme—capable of being enlarged and free of the conditionality attached to outright monetary transactions—the ECB once again rose to the task and eliminated the immediate need for governments to act. The crisis is dramatic, however, and governments rapidly need to announce stimulus packages to stabilise expectations, in addition to financing the immediate ongoing expenses. Issuing mutually guaranteed bonds would signal their determination to overcome this crisis together and dissuade expectations of austerity, once the immediate problems of lockdown have unwound.

Unfortunately, the window of opportunity to deal constructively with the twin problem of high public debt in some euro countries and a lack of safe assets in the euro area as a whole has closed for the time being. Nonetheless, the proposals for sovereign-bond-backed securities (from the ESRB, Bénassy-Quéré et al and Theobald and Tober), capitalised e-bonds, purple bonds and a debt-redemption fund (earlier from the German Council of Economic Experts and Parello and Visco) provide useful pointers for issuing mutual euro-area sovereign bonds.

In the current emergency, we recommend that the ECB play an important role as the institution that has proved to be most functional at the European level and already holds a substantial portfolio of sovereign bonds which can be transformed into euro-area bonds. At all events, conditionality in the form of procyclical austerity measures must be avoided.

This flaw of programmes of the European Stability Mechanism (ESM) in the euro crisis is again looming large. The proposals currently being discussed only envisage a waiver of conditionality for a very limited volume of ESM loans.

EUR-bonds

Our proposal calls for the introduction of EUR-bonds (‘your bonds’) and EUR-bills in the amount of 20 per cent of euro-area gross domestic product, in the following manner. The Eurosystem—the ECB and the national central banks of the euro area—uses its existing portfolio of sovereign bonds to create sovereign-bond-based securities (EUR-bonds). It would do so at the behest of the euro-area governments and in its capacity as a fiscal agent, much as the Federal Reserve Bank of New York assists the United States government in issuing and auctioning its treasury bills and bonds.

At the same time, the governments issue national bonds up to the amount of 20 per cent of domestic GDP. The ECB then issues EUR-bonds and buys national sovereign debt on the secondary market to replace the EUR-securities sold, as it would when securities mature.

Unlike sovereign-bond-backed securities or European Safe Bonds, EUR-bonds are not issued in different tranches with varying risk characteristics. There is no formal guarantee, albeit an implicit one, and lengthy treaty change is not required.

The governments simply agree, in this time of crisis, to ask the ECB to package their bonds into EUR-bonds as a signal and an instrument of solidarity, unity and determination. The ECB could even buy these bonds on the secondary market as part of its purchase programme. Ideally, however, EUR-bonds would be purchased by banks and other investors as safe assets, whereas the ECB would focus its purchasing programmes on eliminating any sovereign-yield differentials which may persist—despite the signals sent out by euro governments in issuing debt together.

Same proportion

EUR-bonds are created by combining euro-area sovereign bonds in the same proportion as the national subscriptions to the ECB’s capital. Accordingly, a EUR-bond with the nominal value of €1,000 is backed by €264 of German sovereign debt, €204 of French, €170 of Italian, €120 of Spanish and so forth.

The risks of default—and thus of moral hazard—will be higher the longer euro-area governments wait to act in unison and present a common front to financial markets, as well as unity to citizens. Taking Italy as an example, even a sovereign yield spread of only 2 percentage points would in itself add €7 billion per year to Italy’s financial burden if the debt ratio rose by 20 percentage points.

In the medium term, the debt ratios of all euro-area countries need to converge to allow for a large market of safe assets, which stabilises the area and reinforces the international role of the euro. Countries with the highest government-debt ratios need stronger growth supported by active European policy instruments, such as a European unemployment reinsurance scheme, revenue-side consolidation in the form of capital levies and more transparent, stringent and growth-friendly fiscal rules.

In the short run, decisive measures are required to allow the economy in all parts of the euro area to recover from the virus shock—and, in so far as possible, foster the structural transformation required to stop global warming.

Thomas Theobald and Silke Tober

Silke Tober is head of monetary-policy research and Thomas Theobold head of financial-market research at the Macroeconomic Policy Institute (IMK) in Düsseldorf.

Harvard University Press Advertisement

Social Europe Ad - Promoting European social policies

We need your help.

Support Social Europe for less than €5 per month and help keep our content freely accessible to everyone. Your support empowers independent publishing and drives the conversations that matter. Thank you very much!

Social Europe Membership

Click here to become a member

Most Recent Articles

u4219834647f 0894ae7ca865 3 Europe’s Businesses Face a Quiet Takeover as US Investors CapitaliseTej Gonza and Timothée Duverger
u4219834674930082ba55 0 Portugal’s Political Earthquake: Centrist Grip Crumbles, Right AscendsEmanuel Ferreira
u421983467e58be8 81f2 4326 80f2 d452cfe9031e 1 “The Universities Are the Enemy”: Why Europe Must Act NowBartosz Rydliński
u42198345f5300d0e 2 Britain’s COVID Generation: Why Social Democracy Must Seize the MomentJatinder Hayre
u42198346761805ea24 2 Trump’s ‘Golden Era’ Fades as European Allies Face Harsh New RealityFerenc Németh and Peter Kreko

Most Popular Articles

startupsgovernment e1744799195663 Governments Are Not StartupsMariana Mazzucato
u421986cbef 2549 4e0c b6c4 b5bb01362b52 0 American SuicideJoschka Fischer
u42198346769d6584 1580 41fe 8c7d 3b9398aa5ec5 1 Why Trump Keeps Winning: The Truth No One AdmitsBo Rothstein
u421983467 a350a084 b098 4970 9834 739dc11b73a5 1 America Is About to Become the Next BrexitJ Bradford DeLong
u4219834676ba1b3a2 b4e1 4c79 960b 6770c60533fa 1 The End of the ‘West’ and Europe’s FutureGuillaume Duval
u421983462e c2ec 4dd2 90a4 b9cfb6856465 1 The Transatlantic Alliance Is Dying—What Comes Next for Europe?Frank Hoffer
u421983467 2a24 4c75 9482 03c99ea44770 3 Trump’s Trade War Tears North America Apart – Could Canada and Mexico Turn to Europe?Malcolm Fairbrother
u4219834676e2a479 85e9 435a bf3f 59c90bfe6225 3 Why Good Business Leaders Tune Out the Trump Noise and Stay FocusedStefan Stern
u42198346 4ba7 b898 27a9d72779f7 1 Confronting the Pandemic’s Toxic Political LegacyJan-Werner Müller
u4219834676574c9 df78 4d38 939b 929d7aea0c20 2 The End of Progess? The Dire Consequences of Trump’s ReturnJoseph Stiglitz

S&D Group in the European Parliament advertisement

Cohesion Policy

S&D Position Paper on Cohesion Policy post-2027: a resilient future for European territorial equity”,

Cohesion Policy aims to promote harmonious development and reduce economic, social and territorial disparities between the regions of the Union, and the backwardness of the least favoured regions with a particular focus on rural areas, areas affected by industrial transition and regions suffering from severe and permanent natural or demographic handicaps, such as outermost regions, regions with very low population density, islands, cross-border and mountain regions.

READ THE FULL POSITION PAPER HERE

ETUI advertisement

HESA Magazine Cover

What kind of impact is artificial intelligence (AI) having, or likely to have, on the way we work and the conditions we work under? Discover the latest issue of HesaMag, the ETUI’s health and safety magazine, which considers this question from many angles.

DOWNLOAD HERE

Eurofound advertisement

Ageing workforce
How are minimum wage levels changing in Europe?

In a new Eurofound Talks podcast episode, host Mary McCaughey speaks with Eurofound expert Carlos Vacas Soriano about recent changes to minimum wages in Europe and their implications.

Listeners can delve into the intricacies of Europe's minimum wage dynamics and the driving factors behind these shifts. The conversation also highlights the broader effects of minimum wage changes on income inequality and gender equality.

Listen to the episode for free. Also make sure to subscribe to Eurofound Talks so you don’t miss an episode!

LISTEN NOW

Foundation for European Progressive Studies Advertisement

Spring Issues

The Spring issue of The Progressive Post is out!


Since President Trump’s inauguration, the US – hitherto the cornerstone of Western security – is destabilising the world order it helped to build. The US security umbrella is apparently closing on Europe, Ukraine finds itself less and less protected, and the traditional defender of free trade is now shutting the door to foreign goods, sending stock markets on a rollercoaster. How will the European Union respond to this dramatic landscape change? .


Among this issue’s highlights, we discuss European defence strategies, assess how the US president's recent announcements will impact international trade and explore the risks  and opportunities that algorithms pose for workers.


READ THE MAGAZINE

Hans Böckler Stiftung Advertisement

WSI Report

WSI Minimum Wage Report 2025

The trend towards significant nominal minimum wage increases is continuing this year. In view of falling inflation rates, this translates into a sizeable increase in purchasing power for minimum wage earners in most European countries. The background to this is the implementation of the European Minimum Wage Directive, which has led to a reorientation of minimum wage policy in many countries and is thus boosting the dynamics of minimum wages. Most EU countries are now following the reference values for adequate minimum wages enshrined in the directive, which are 60% of the median wage or 50 % of the average wage. However, for Germany, a structural increase is still necessary to make progress towards an adequate minimum wage.

DOWNLOAD HERE

Social Europe

Our Mission

Team

Article Submission

Advertisements

Membership

Social Europe Archives

Themes Archive

Politics Archive

Economy Archive

Society Archive

Ecology Archive

Miscellaneous

RSS Feed

Legal Disclosure

Privacy Policy

Copyright

Social Europe ISSN 2628-7641