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Corona bonds: solidarity is now needed in the euro zone


The crisis after the crisis is already emerging. European countries are at risk of going bankrupt as a result of the corona epidemic. If Italy, Spain, and possibly France can no longer borrow money on acceptable terms, our economic order will collapse. Nothing would have been so far: the internal market, the currency, our prosperity. The social and political consequences would be unforeseeable.

This scenario is by no means absurd. The epidemic has increased the debt burden by leaps and bounds. A month-long shutdown will shrink economic output by double-digit percentages. State revenue is in free fall, while spending is skyrocketing (watch out for new unemployment figures on Tuesday and Wednesday). There has never been such a constellation in peacetime. Even during the Great Depression of the 1930s, things were not going so steeply, and the nervousness of the financial markets had already been evident in the past few weeks. Interest rates on Italian, Spanish and French government debt rose because investors feared the higher risk of bankruptcy in these countries. Risk premiums have dropped again after the European Central Bank (ECB) announced that it would buy securities worth EUR 750 billion. For the moment there is silence. But given the grim outlook, it won't last.

The euro crisis is coming back. Between 2010 and 2015, threatened state bankruptcies had kept Europe and the rest of the world in suspense. A lot has changed in Europe in these years. But one thing is like back then: The euro zone cannot react to severe, acute crises like other currency areas because it hardly borrows in common. This is a fundamental problem, for example, in the United States: Parliament, the U.S. Congress, decides to take on new debt, which the government then borrows. If there are problems selling these bonds on the financial markets, the Federal Reserve Bank purchases securities, if necessary on a large scale. Central banks can prevent state bankruptcies. The price may be rising inflation later, but this is not a primary problem in an acute crisis like the current one. Avoiding a system crash is an absolute priority.

The problem of joint liability in the euro area, on the other hand, is the individual Member States that incur debt. National parliaments decide on public borrowing. If they get stuck later, there is no national central bank that can step in indefinitely and calm the markets. If the ECB bought up national debt, this would result in a redistribution of risks, something that no parliament had previously decided on. If the Eurobank were to buy up massive Italian sovereign debt, in the end all Eurostates would have to be liable for it, without being able to have a say in advance. (Exactly to avoid this redistribution effect, the ECB purchases securities of all euro countries according to their respective capital shares as part of its bond purchase program.)

In an acute crisis, only a central bank is able to act indefinitely because only it can create unlimited money – only it can ultimately and effectively counter a collapse of entire credit markets. In order for a central bank to act in this way, it needs securities that it can and may theoretically buy indefinitely. But this does not exist in the eurozone, and in view of the corona crisis, this constructional error in the currency union is now becoming clear. Because there is no highly legitimate federal state level, there are narrow limits to joint borrowing – that is, joint liability. In the face of the corona crash, which has brought the economy into a state of free fall, haste is in order. At the video EU summit last week, the heads of state and government postponed the topic for the time being, for now the old reflexes are still intact. France, Italy, Spain and other southern states are calling for debt communitization. Germany, the Netherlands and other northern states, on the other hand, say no, which is roughly what the video summit was about. The south demanded euro bonds (now renamed "corona bonds"): promissory notes for which the euro countries are jointly liable. The north didn't want to know anything about it – you'd better wait and see, it sounds like a new performance of the excruciatingly long drama of the euro crisis. At that time, the tough stance of Germany and other northern European countries could perhaps still be justified: The debt crisis hit countries with unsound public finances and economies that were not very hard hit. The ongoing crisis should teach them discipline. This can be cynical, but at least there was a certain logic in it: the deterrent effect of the crisis should ensure long-term stability of the eurozone. Panic needs determination This time everything is different. It is now a natural disaster beyond the control of the state, as the Bundestag found last week when the debt brake was suspended. It is therefore wrong to delay the use of instruments or to exclude them entirely. The task now must be to help countries that have been particularly hard hit by the plague. Whatever it takes, it's about human life – and also about symbols of intra-European solidarity. Those who now stand by and watch partner countries go bankrupt will have to be accused later of being responsible for the disintegration of the euro zone. Then good night: In a world riddled with hostility, individual European countries would become game balls for the great powers, and the aim is to contain the enormous uncertainty. The best way for governments to do this is to disclose their toolbox and thereby stabilize, as far as they can, the expectations of citizens, companies and investors. The method of taking small steps, waiting and hesitating is wrong under the given conditions. Politicians must not now create additional uncertainty with policies that are postponed. Panic needs determination. And it's about ultimate credibility. The only way the Eurozone can achieve this is to enable the ECB to buy up unlimited amounts of debt. According to the applicable rules, the ECB can only jump to countries that have an assistance program with the ESR. Only then can the ECB jump to individual countries indefinitely. So it is in the guidelines for the "Outright Monetary Transactions" (OMT), which formalized and legally safeguarded the announcement of the then ECB chief Mario Draghi to support individual euro countries Whatever it takes.

The ESM euro rescue umbrella, led by the former German top official Klaus Regling, would be of central importance in coping with the corona crash. The fund and its predecessor EFSF can together lend up to € 700 billion. This limit could be increased many times over if all euro countries agree. The fund borrows most of this money from the capital market by issuing bonds. This is guaranteed by the 19 euro member states that are shareholders of the fund, according to their capital shares, in turn legitimized by the national parliaments.What are we waiting for? If all euro member states would agree precautionary credit programs for the coming crisis with the ESM, the European Central Bank could both borrow individual bankruptcies Buy countries as well as ESM bonds, which would then become real Eurobonds. It would be an insurance against national bankruptcies. The consequences of the corona crisis would still be bad enough, but at least parts of Europe would not go bankrupt unchecked. And it would also be insurance against populist leaders like Italy's Matteo Salvini who flatly reject ESM programs because they see this as an encroachment on national sovereignty – these are not times for strategic games, for cautiously approaching little ones. In view of this natural disaster, what was perhaps justifiable during the euro crisis is fundamentally wrong, which could be Europe's moment. The moment when an "ever closer union of the peoples of Europe", as stated in the EU treaty, turns into a real federation. And the medium that promotes this change could be common money. Public life and the economy stand still in large parts of Europe. The reactions to the danger posed by the corona virus may have been national at first. But that won't be enough in the medium term. What are we waiting for?
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