The coronavirus pandemic has revived the debate between euro zone countries about jointly issuing debt to meet healthcare needs and address the deep economic downturn that is set to follow.
Nine of the 19 countries that use the single currency called on March 25 for a common debt instrument issued by a European institution to fight the outbreak and its effects.
- The idea of such debt, called “coronabonds”, was rejected by Germany, the Netherlands, Finland and Austria, fiscally “frugal” northern states wary of pooling liabilities for the more spendthrift countries in southern Europe.
- The idea of joint debt issuance was previously raised by Italy, during the 2009 global financial crisis, and by France and Italy in 2012, at the peak of the euro zone’s sovereign debt crisis, and dismissed by Berlin and its allies. But ideas are likely to evolve and deepen as the current crisis prompts more discussion.
- The euro zone jointly issues debt through its bailout fund, the European Stability Mechanism, which borrows on the market against the security of its paid-in and callable capital provided by euro zone governments.
- The European Commission had previously issued debt through the European Financial Stability Mechanism (EFSM) to help fund the bailouts of Greece, Ireland and Portugal and give balance of payments help to Latvia, Hungary and Romania.
- The EIB, the investment arm of the EU, is owned by EU governments and issues around 60 billion euros of debt every year to lend for various projects in the bloc.
Bonds, or fixed-income investments, are essentially loans from an investor to a company or government. Bond investors receive periodic payments based on the interest rate at which the bond was sold.