Eurobonds May be the Necessary Economic Objective to Unify the EU

The Italian Prime Minister Mario Draghi has recently brought back the attention to the concept of Eurobonds (Colombo, 2021). The idea that has been glooming throughout some European capitals would be to issue common European bonds to avoid asymmetric chocs and essentially fiscally unite the continent. The arguments for pros and cons are systematically of political and economic nature. The creation of Eurobonds would, today, prevent states with high public debts to be inflicted with new debt.  There is a cultural argument that emphasizes Eurobonds as a tool to accentuate European solidarity. In this discussion Northern European countries, Germany included, always refused Eurobonds. Memorable was the meeting between Jean Claude Juncker, Angela Merkel and Giulio Tremonti (ex-Italian Minister of Finance) in 2010, in which the German Chancellor opposed to the idea of common bonds as a tool to solve the sovereign debt crisis (Wishart, 2010). Even today, Northern European states perceive the continued quantitative easing pursued by the European Central Bank as a momentary economic solution to respond to the Covid-19 crisis. Yet things may be slowly changing, and the joint issuance of bonds may not be so temporary.

The EU: a weaker geo-political actor after Covid

Gideon Richman released an article in April 2020 opposing to the creation of Eurobonds (Richman, 2020). The core argument was that Northern European governments, given the economic crisis, would unlikely support EU’s shift to a financial union given its historical low appeal among the electorate. Indeed, it has been challenging, even during the European Sovereign Debt Crisis, to convince part of the electorate of repairing the debatably culpable economic deficiencies of Southern states. Richman (2020) also agreed “that longer term fears of northern Europeans are also legitimate”. A year after the article, the geoeconomics and geopolitical evolution of the world order imposes a different vision.

Europe is not an active geo-political decision maker. The Covid-19 pandemic highlighted the bloc’s lack of economic independence in strategic sectors. A characteristic that rapidly translated into lack of sovereignty. The EU lacks big-Tech hubs, common fiscal policy, world-centers for research -and the infrastructures this entails-, a cohesive and rapid decision-making process etc. This makes the bloc dependent on foreign actors to the extent of being “forced” to undertake economic agreements even with states that violate values like human rights or freedom of speech. It is not a surprise, for example, to see EU’s incapacity or unwillingness of responding to the violations of human rights committed by Russia or China given its economic dependency on the two blocs. The Nord Stream 2 pipeline or the CAI (EU-China Comprehensive agreements) are just the two last examples of European inability of safeguarding and promoting values enshrined in Art 2 of the Treaty of Maastricht of 1993 (TEU, 1993). The lack of productivity in strategic sectors provokes a lack of geo-economic leverage that is slowly drowning the EU. Even in the Brexit-battle the UK, despite doubts of behavioral loyalty on the exchange of doses of vaccines, exited momentarily victorious from the Covid crisis, provoking further discontent within EU institutions. With Astra-Zeneca the UK vaccinated over 33 million people by the end of March. Italy and Germany had approximately 23 million vaccinations combined in the same time span (Our World in Data, 2021)[1]. Brexit was perceived from Brussels as the occasion to extrapolate from London its financial supremacy, thence pushing for the development of a free market of capitals in the continent. Once again domestic divergences and weak a geo-political position prevented this from occurring, momentarily causing discouraging results (Ungaro, 2021). The “vaccine battle” is a mirror of Europe’s position in the world order, it lacks strategic productivity and strategic commercial power (Severgnini, 2021).

Changes in the EU: the fiscal union is less utopic.

Draghi’s push for Eurobonds brings a historic argument to the table: the EU consistently prevailed domestic reasoning the moment it needed to unite common debts and common risks (Monti, 2021). The occasion and the challenge of promoting Eurobonds is political. It would be the final step towards common taxation and common spending, developing a European economic force capable of competing in global stages. The first challenge is the hostility of northern European countries. The German Federal Constitutional Court has recently paused the implementation of the Recovery Funds as the far-right party Alternative for Germany claimed it may bring German citizens to pay for debts of other European states in the future (Chazan, 2021). Throughout the pandemic Germany and other northern states, that were historically against the mutual debt, have accepted a continuative quantitative easing from the ECB, and the issuance of common debt securities on the SURE (Support to mitigate Unemployment Risks in an Emergency) (European Commission, 2020).  Yet a permanent common fiscal union is at the moment negatively considered in Northern states. This brings us back to the nature of policy making of the EU. Sovereign states have unanimously signed in 2007 the Lisbon Treaty, maintaining intact an intergovernmental procedure within the institutions regarding Justice and Home Affairs and fiscal matters. This means that to shift to a fiscal union (and thence the Eurobonds) we would need all 27 member states to agree upon the instruments. As previously mentioned, this is, for now, a very unlikely situation.

Though the situation may be moving. Merkel’s dismissal and the possible entry of the greens in the majority may bring a fresh perspective in Germany (Smith Beyer, 2021). In France the duel between Macron and Le Pen predominantly revolves around cultural identity and different stands on the EU. If Macron will exit victorious in 2022 the concept of fiscal unity will inevitably be rediscussed on an increasingly pan-European perspective. In fact, if the fiscal procedure initiated following the Covid-19 pandemic will prove to work, it may represent a springboard to start conceiving a revolutionary and unitary capital market. Especially given that a debt security issued by the Commission would have very low levels of risk. This means that in the long-run Eurobonds would likely advantage even Northern European states. This given that having positive interest rates (that can be pursued by banks as capital) would result convenient for everyone. The Franco-German axis is going through political changes, and Italy is led by an authoritative figure that is determined to pursue a fiscal union (Horowitz, 2021). The post-pandemic economic and political conditions of the continent may trigger new opportunities.

Eurobonds: challenges and ideas

Marcello Messori, professor at University of Luiss in Rome, observed that the functioning of the Recovery Fund and a hypothetical issuance of Eurobonds poses the EU in front of two interconnected issues that offer new opportunities (Colombo, 2021).  The first is that Eurobonds can only come as a consequence of a fiscal union. The second is how to finance such a system (Colombo 2021). Debt security that is issued in the market has to be refunded. The loans to finance the Eurobonds would be covered by member states. Though to pursue grants the EU would need to develop canals that allow enough capital for its multiannual financial framework to be balanced.  In simpler terms, the EU would need to tax to obtain such capital. This being a fiscal power the bloc lacks -except minimal elements like the VAT-.

Here comes the great chance. A coherent European response could ideally target multinationals and big techs, thus gaining the capital for grants by taxing big corporations. It would be a manner to de facto upgrade the bloc’s independence in fiscal corporeality, and avoid intergovernmental race to the bottom to attract Foreign investors. The EU would be leader in example in promoting level playing field and especially in protecting politics from the economic “monsters”, delineating the line between public and private governance. The fiscal union and the Eurobonds would increase democracy and legitimacy within the EU. Unanimity, as contested by Sergio Fabbrini (2017), allows that one or two small states slow down the progress of an entire continent. A minority that slows down the majority. Since the creation of Eurobonds could only arrive with a fiscal union, the latter would develop a faster decision-making procedure within institutions. Consequently, empowering supranational institutions to support European firms in global markets. This could open the door to an EU able to a) invest in global level projects b) invest in strategic sectors (high tech, research etc).

It makes sense to see how Draghi discusses of Eurobonds without referring to a fiscal union. The Italian Prime Minister understand that the idea of a fiscal union scares the governments and the electorate of northern states. On the other hand, Eurobonds may be the economic objective to pursue a major socio-political shift towards unity. The future of the EU as a political force will reside in the ability of member states of changing and cooperating to develop European solutions to next moments of crises. Protecting Europe’s geo-political role means protecting liberal democracy and core values human rights. This has to come with an unchaining of European bureaucratic methodologies. The EU is still culturally divergent and inhomogeneous. The development of fiscal tools that “unite” may be the last chance to pursue the creation of the European project. Eurobonds and fiscal unity may be the right solution to shielding liberal democratic values.

References:

Richman, Gideon. “Eurobonds Are Not the Answer.” Subscribe to Read | Financial Times, Financial Times, 6 Apr. 2020, www.ft.com/content/b809685c-77de-11ea-af44-daa3def9ae03.

Ungaro, Stefano. “Arriva L’inflazione Da Covid? La Storia Tedesca Insegna Che Il Vero Pericolo è L’austerità.” Domani, Domani, 4 Apr. 2021, www.editorialedomani.it/idee/commenti/arriva-linflazione-da-covid-la-storia-tedesca-insegna-che-il-vero-pericolo-e-lausterita-vg9mqye0.

Monti, Mario. “Eurobond, Ora Si Può.” Corriere Della Sera, Corriere Della Sera, 20 Mar. 2020, www.corriere.it/editoriali/20_marzo_20/eurobond-ora-si-puo-154160e8-6aeb-11ea-b40a-2e7c2eee59c6.shtml.

Chazan, Guy. “Germany’s Highest Court Blocks Ratification of EU Recovery Fund.” Subscribe to Read | Financial Times, Financial Times, 26 Mar. 2021, www.ft.com/content/74841ea6-4fbf-4c7a-b015-66ba191ffc9b.

Jowan, Claire. “Press Corner.” European Commission – European Commission, 25 Nov. 2020, ec.europa.eu/commission/presscorner/detail/en/IP_20_2196.

Smith-Meyer, Bjarke, et al. “Professor Nein: Economist Threatens EU Recovery Fund.” POLITICO, POLITICO, 6 Apr. 2021, www.politico.eu/article/bernd-lucke-economist-germany-recovery-fund-europe-professor-nein/.

Fabbrini, Sergio. “Vaccini, La Ue Vada Oltre Il Coordinamento Tra i Governi Nazionali.” Il Sole 24 ORE, Il Sole 24 ORE, 29 Mar. 2021, www.ilsole24ore.com/art/vaccini-ue-vada-oltre-coordinamento-i-governi-nazionali-ADqQ6aTB.

Servergnini, Beppe. https://www.la7.it/otto-e-mezzo/rivedila7/draghi-e-la-battaglia-dei-vaccini-otto-e-mezzo-puntata-del-942021-09-04-2021-374538

Fabbrini, S. (2017). Intergovernmentalism in the European Union. A comparative federalism perspective. Journal of European Public Policy, 24(4), 580–597. doi: 10.1080/13501763.2016.1273375

Horowitz, Jason. “How Mario Draghi Is Making Italy a Power Player in Europe.” The New York Times, The New York Times, 15 Apr. 2021, www.nytimes.com/2021/04/15/world/europe/italy-draghi-eu.html.

[1]   Our World in Data • This data shows the total number of doses given in each location. Since some vaccines require more than 1 dose, the number of fully vaccinated people is often lower. “+” shows data reported yesterday