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The Germans are right: Eurobonds are a terrible idea

If you’ve only been reading the Irish media, there’s a very good chance you won’t be aware of the mounting row in Brussels over whether or not the EU should issue so-called “Eurobonds” to help countries like Italy (and Ireland, indeed) get through the Covid-19 crisis. There has been some coverage, but not a vast amount. Here’s a piece from the Irish Times business section on the subject four days ago, with a brief background before we get into it:

European Union leaders gather by video conference on Thursday in a meeting likely to see a showdown over the issue of common debt issuance or eurobonds as extra financial firepower to deal with the coronavirus pandemic.

Nine euro zone countries, including Ireland, have appealed for the common debt instrument to mitigate the economic damage from the crisis, which economists warn is causing a shock of historic scale.

“We need to work on a common debt instrument issued by a European institution to raise funds on the market on the same basis and to the benefit of all member states, thus ensuring stable long-term financing for the policies required to counter the damages caused by this pandemic,” the letter from the nine states reads.

It was signed by the leaders of Belgium, France, Italy, Luxembourg, Spain, Portugal, Greece, Slovenia and Ireland – all members of the euro zone.

What is a “Eurobond”, anyway?

Well, basically, it’s an instrument for common borrowing. Instead of the Irish Government borrowing on the strength of our own national balance sheet, it would borrow money based on the strength of the European economy – which would, presumably, be much cheaper in the long run. The EU economy is much bigger than ours, thousands of times bigger, in fact, and therefore we could access more money at even better interest rates than the already very low rates we (the country) pay now.

Basically, with Eurobonds, EU countries would pool their resources to access borrowing to fund the crisis. It sounds like common sense, doesn’t it?

But the Germans, and the Dutch, are fanatically opposed:

The European Stability Mechanism (ESM) is the right instrument to share the economic burden of the coronavirus crisis, German finance minister Olaf Scholz said on Sunday, reiterating that jointly issued debt by euro zone members was not the right way to counter the impact of the pandemic.

“The proposal that we are now discussing very concretely is to activate the European Stability Mechanism, which would make it possible to mobilise a lot of money”, he said.

Italian Prime Minister Giuseppe Conte has called for special “coronavirus bonds” to help EU states finance health spending and economic rescue programmes. European Central Bank chief Christine Lagarde asked euro zone finance ministers to seriously consider a one-off joint debt issue of “coronabonds.

But Germany and other Northern countries such as the Netherlands have rebuffed the idea of issuing eurobonds.

Why are the Germans so opposed, you might ask?

Because money that is borrowed jointly has to be jointly paid back.

Think of it this way: Imagine your four closest neighbours and you all own your own homes, but one of your neighbours has a fire that destroys their kitchen. They come to you and their other two neighbours and say “would the three of you be so good as to guarantee the loan we need to rebuild our kitchen?”

Now it’s possible that you like your neighbours very much, and are very eager to help, and would say yes.

But then imagine that your neighbour has almost been bankrupt two or three times in the last decade, and that you had to bail them out just a few years previously.

That’s the German perspective on all of this: That country has no difficulty funding the Covid-19 crisis because, to German eyes at least, they’ve been frugal and careful for decades now, meaning that they have the financial capacity to sort out a mess when one comes. The Italians (and to German eyes, the Irish) by contrast, have spent and spent and spent and now, if the cupboard is bare, why should Germans take on Italian and Irish debt?

But leave the Germans out of it, and look at it purely from an Irish point of view: Are we willing to spend the next decade paying off the debts of Italy and Spain, as well as our own? Because that’s what Eurobonds are – an agreement to pay somebody else’s bills.

All of this exposes, of course, a fundamental problem with the Eurozone which has never been solved – because as the Italians rightly point out, if their country collapses in a heap because of this crisis, then that will have massive ramifications for the currency we all share.

During the last crisis, as we painfully remember here, the solution was for EU countries to lend each other money in the form of so-called “bailouts” – but all of that money has to be repaid from one country, to another. There are still bad memories of that process, relatively fresh in our minds, here.

At first glance, so, common debt is a better solution. But the big problem with common debt is that you really need some form of common taxation to pay it back. Imagine, if you will, that Eurobonds went ahead, and the Germans were paying back part of Ireland, and Italy’s, debt.

The Germans might well, in those circumstances, point out that it’s unfair that German companies are paying a 30% corporate tax rate to help pay back Irish debt when Irish companies are only paying 12.5%. And wouldn’t they have a point?

The Irish Government is over in Brussels demanding these Eurobonds – but they’re a recipe for us to surrender our sovereignty and accept – as an essential condition – much more control over fiscal policy from the EU.

If that sounds acceptable to you, fair enough. It doesn’t strike me as a good idea, for either us, or anyone else.

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