Europe News

How far will Europe go? Central bankers and EU leaders push for 'corona bonds'

Key Points
  • The issue is highly controversial, but the main idea is to come up with new funding to mitigate the economic fallout from the coronavirus outbreak.
  • The latter has decimated thousands of lives across Europe and brought all its economies to a standstill.
BRUSSELS, BELGIUM - OCTOBER 18: German Chancellor Angela Merkel (L) talks with the French President Emmanuel Macron (C) and the Luxembourg Prime Minister Xavier Bettel (R) ahead of round table talks at a EU leaders summit on October 18, 2019, in Brussels, Belgium.
Thierry Monasse | Getty Images News | Getty Images

European countries are under growing pressure to take an unprecedented move and issue a new kind of debt to tackle the economic impact of the coronavirus.

Central bankers, heads of state and economists have called on the euro zone to develop so-called corona bonds, a new instrument that would combine securities from different European countries.

The issue is highly controversial, but the main idea is to come up with new funding to mitigate the economic fallout from the coronavirus outbreak. The latter has decimated thousands of lives across Europe and brought all its economies to a standstill.

"The political hurdles for joint debt issuance in the euro zone remain high. But in 'whatever it takes' times, taboos can be broken," Florian Hense, economist at Berenberg bank, told CNBC on Monday via email. 

Conservative policymakers in countries such as Germany, the Netherlands and Austria are often wary of the idea of issuing debt together with highly indebted nations, such as Italy, Greece and Portugal. They had initial discussions on this issue at the height of the sovereign debt crisis of 2011, but certain nations believed it was too risky to join their debt with other countries, which were deemed at a higher risk of default.

However, the coronavirus is reviving the debate given the widespread financial shock caused by the virus.

We're facing a symmetric shock all across Europe that isn't any country's fault.
Jens Sudekum
professor of international economics in Germany

European Central Bank (ECB) member Carlos Costa said on Monday that the euro area, where 19 countries share the same currency, should further analyze the possibility of corona bonds.

"Solutions must be found in order to avoid that the coronavirus emergency becomes a second sovereign debt crisis," Costa, who is also governor of the Bank of Portugal, said in an article.

He believes that this new debt should have maturities of several decades to make it even easier on European governments and would only be used to deal with the economic consequences of the virus.

Spanish Prime Minister Pedro Sanchez also supported Sunday the idea of corona bonds in "the war against the coronavirus."

Seven economists in Germany have also said that "extensive government aid is required" to deal with the coronavirus outbreak. Euro zone governments should issue joint bonds amounting to 1 trillion euros ($1.08 trillion) to spread the cost of the crisis — this would be a one-off measure, they contended in an article.

Jens Sudekum, professor of international economics in Germany and one of the authors of the article, told CNBC: "We're facing a symmetric shock all across Europe that isn't any country's fault. The old crisis instruments (the European Stability Mechanism) is designed for asymmetric shocks and assumes that countries have made systematic mistakes in the past. None of that applies to the current crisis."

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European leaders briefly debated the possibility of corona bonds last week. 

Finance ministers of the euro zone are discussing Tuesday new ways to stem the impact of the virus on their economies.

Their main plan for now seems to be developing credit lines using the European Stability Mechanism — a fund established by all euro zone countries at the height of the sovereign debt crisis to provide emergency loans to nations at risk of financial collapse. 

In order to provide that credit line, the ESM would have to raise money from financial markets. This could also be seen as issuing corona bonds, given that the fund is backed by all euro area countries and the credit line would be targeted at dealing with the impact of the coronavirus.

"Whether or not Europeans help each other in this acute emergency can shape popular perceptions of what Europe stands for – and for a long time to come," Hense from Berenberg warned.

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