The word “eurobonds” continues to generate huge tension in Brussels. Inherited from the debates of the previous crisis, those nine letters still have the power to derail any discussion. In Nordic countries like Denmark and in other fiscally orthodox ones such as the Netherlands or Germany —the so-called “frugals”—, that term remains linked to debates about moral hazard, fiscal transfers and incentives to bail out the culprits. And yet, there is a growing consensus on the need for Europe to have them. Carlos Cuerpo, the government’s Deputy Prime Minister for Economic Affairs, is dedicating a large portion of his political capital in Brussels to pushing the debate.
Eurobonds have moved from the realm of academia and ideas to reality. They did so in 2020, when, in the wake of the pandemic, the EU issued 800,000 billion at current prices to finance the Recovery Fund, which, in fact, is about to end. Despite calls from many actors, including the European Central Bank (ECB), to avoid letting that program end, Berlin and The Hague’s opposition makes the end of the Recovery Fund definitive, and, with it, those European bonds that financed the program will gradually disappear. After the coronavirus, these bonds have also been used more recently for the SAFE rearmament program and for the 90,000 million euro loan to Ukraine.
“Eurobonds have moved from the realm of academia and ideas to reality […] in 2020 the EU issued 800,000 million to finance the Recovery Fund”
The Spanish government has proposed a broad use of common debt to finance part of the next multiannual financial framework (MFF), which will cover the period 2028-2034, a notion that, although welcomed by academics and eurobond advocates in the public debate, has not gained traction in internal discussions. Cuerpo is changing strategy: he is trying to present the proposal not as an eurobond, but precisely as the opposite. He is trying to think like a “frugal”.
The deputy prime minister carried his proposal to a meeting of finance ministers held in Brussels last week. Rather than presenting the idea from scratch, he framed it within the discussion about the international role of the euro and proposed the idea of a large market for “safe assets” —in other words, eurobonds—, exactly as a way to fulfill the goal of reaffirming the international role of the common currency. Currently, there are about 750,000 million euros in European bonds circulating against the 20 trillion dollars of American debt. The Spanish proposal would raise the amount of European bonds to five trillion euros and would save 25,000 million euros a year in interest, according to the Ministry.
For the most radical advocates of eurobonds, the Spanish proposal might seem modest, precisely because it is designed to shift the red lines of the “frugals.” Thus, Cuerpo proposes that the mechanism, which would be voluntary, would ensure that one third of the debt of participating countries is refinanced at a European scale. Instead of the member state refinancing a specific debt directly to finance its deficit, the Commission would issue European bonds and subsequently channel them to capitals as loans.
“The Spanish proposal may seem modest, precisely because it is designed to try to move the red lines of the ‘frugals’.”
The Spanish proposal also takes into account the usual complaint from partners like the Netherlands or Germany: that these mechanisms serve to finance those who are less fiscally responsible. The idea is that only those member states that comply with the Treaty on Stability and Growth, i.e. the EU’s fiscal rules can participate. Moreover, as it is clear that some countries with a higher risk premium, such as Poland, would benefit the most, the reflection paper distributed by Madrid includes a safeguard: those countries that could refinance that one third of the debt directly in the markets at more favorable rates will be compensated by the rest of the participating member states in the initiative.
Regarding the inevitable question of what happens if a government defaults, the immediate answer is that the guarantee is the margin of maneuver, or headroom, of the MFP. That is a sensitive point, because it requires unanimity and because it would amount to a form of risk mutualization, precisely what the “frugals” oppose. But that would be the immediate response. That money would be replenished in two ways: first, the amount equivalent to the debt that was not honored would be deducted from the funds the debtor country would receive from the MFF, and if that is not enough, the rest of the countries participating in the mechanism would absorb that debt, and the government in question would owe that money to the other European countries that are part of the initiative.
“Those countries that could refinance that third of the debt directly in the markets at more favorable rates will be compensated by the rest of the participating member states”
For skeptics, that second phase is mutualization, though written in lowercase. Although Cuerpo has defined the idea as an “obvious” measure —the same word used by Christine Lagarde, President of the ECB—, the opposition remains very firm. Eelco Heinen, the Dutch finance minister, was unequivocal upon arriving at last week’s meeting: “The answer is always the same and it is no”. Other “frugal” countries, such as Austria, have shown somewhat more receptiveness to the idea. Unexpectedly, it has been France, a country actively supporting European joint debt issuance, one of the strongest critics of the proposal due to the mechanism proposed, since “if a country transfers its debt to the whole community, that could encourage that country to borrow even more,” in the words of French Finance Minister Roland Lescure. France is the third most indebted EU country relative to its GDP and the most indebted in absolute terms.
Sources from the Ministry explain that the “frugals” need time and that the proposal has been framed in a way that helps their respective governments sell an idea that is sensitive for their domestic electorates. The key for the idea to survive is that it counts at least on the support of the so-called E6, the group of six major European economies, in which Spain, Germany, France, Italy, the Netherlands and Poland participate, a forum where the integration of capital markets is being debated and where sources assure that there are no vetoes to discussing anything.
