From lockdown to takeoff: The case for a federal eurobond

Andrew Duff makes the case for the bold launch of a federal eurobond secured against the EU budget. 


Muddling through

The Eurogroup (7-9 April) laboured long to take a clutch of measures designed to ease short-term liquidity problems.[1] The steps adopted, amounting to a possible €400 billion, comprise increased loans from the European Investment Bank (EIB), the offer of credits from the European Stability Mechanism (ESM), and a new temporary loan instrument by the European Commission to soften the blow of unemployment (Support to mitigate unemployment risks in an emergency, or SURE). The package complements the European Union’s earlier decision to relax its normal rules of state aid and public procurement, as well as the virtual suspension of the Stability and Growth Pact, for the duration of the COVID-19 plague.

Not for the first time in a crisis, it is the European Central Bank (ECB) that has been bold. Its new Pandemic Emergency Purchase Programme (PEPP) will allow the Bank to purchase €750 billion of national government bonds without being bound by the usual constraints of national quotas.

Even the most charitable reading of the decisions of the Eurogroup could not call them transformative. The net effect of the package is unlikely to stave off the eurozone’s next financial crisis once the true impact of the coronavirus pandemic is realised. Potential beneficiaries of the Eurogroup’s measures will be saddled with further national debt thereby accentuating regional imbalances within the eurozone.

Argument has already broken out about the meaning of the Eurogroup package, notably between the old adversaries, France and the Netherlands. Italy is refusing to use the ESM facility because of the political conditions attached. Negotiations on the new Multi-annual Financial Framework (MFF) for 2021-27 look to become even more fraught. The European Council, meeting by videoconference on 23 April, seems unlikely to calm the bad temper.

The heart of the matter is the failure of the Council to do more than promise further discussion about establishing a coronavirus recovery fund. The Dutch and Austrians, in particular, remain fiercely opposed to any measure which implies a mutualisation of sovereign debt.

Solidarity in public health

‘Brussels’ has been criticised for its reaction to the coronavirus. Contrary to much commentary, however, the Union does not lack tools to react in a spirit of solidarity in a time of emergency. The Treaty of Lisbon (2007) even gave the Union its own solidarity clause: Article 222 TFEU allows for a Council decision on a proposal of the Commission to “mobilise all the instruments at its disposal, including the military resources made available by the Member States, to […] assist a Member State in its territory, at the request of its political authorities, in the event of a natural or man-made disaster”.

Likewise, Article 122 prescribes a Council decision, “in a spirit of solidarity between Member States”, to come to the economic aid of a state which is “in difficulties or is seriously threatened with severe difficulties caused by natural disasters or exceptional occurrences beyond its control”. Hail COVID-19.

In the specific field of public health, Article 168 gives the Union the power to support, coordinate and supplement the activities of the member states. It may be that the Commission has not used those powers to the full or been sufficiently prescient in trying to prepare states for a coronavirus attack.[2] We can hope that the right lessons will be drawn from this crisis so that Europe is better prepared for the next emergency, and that in future the EU institutions will play a more confident role in the critical sector of public health.

The scale of the problem

Meanwhile, Europe faces the most serious economic collapse of our times, with a sudden and unexpected loss of both supply and demand. Furlough is widespread, unemployment is rising fast and much trade has stopped both within and without the EU internal market. The scale of economic recovery is set to be huge and its timescale long, particularly in public health and social care but also in sectors that have been shut down for the duration of the pandemic, such as transport, recreation, education, non-food retail and construction.

The plague compounds the many problems already faced by the European Union. The Schengen Agreement was in bad repair even before internal EU borders were slammed shut. When the coronavirus recedes, the migration pressure from Turkey and North Africa will return. The Green Deal remains to be legislated. Negotiations on the MFF have to be re-started. And Brexit hovers like a nuisance drone over the whole of Union business.

Structural flaws

The political crisis neatly exposes the structural flaw at the heart of the European Union. Can the single currency long survive from crisis to crisis without a fiscal union? Most economists now doubt that. Many of the politicians who created the Economic and Monetary Union, including the then Dutch Prime Minister Ruud Lubbers and German Chancellor Helmut Kohl, were wise to that in the first place.

The eurozone has next to nil fiscal capacity of its own. The lack of a mutualised safe asset limits the mix of policy instruments available for good eurozone governance. The development of a strategic global role of the euro is stunted. And the eurozone will be left vulnerable to new asymmetric financial shocks in the future as and when it recovers economically from the universal pandemic.

The question, therefore, is whether the pandemic can be the trigger that leads to the deeper fiscal integration of Europe. Or will economic depression pull the Union apart?

A number of interesting proposals for recovery funding directly connected to the pandemic have emerged. Bruno Le Maire, French finance minister, has proposed a common issuance of bonds secured against the joint and several guarantee of the member states rather than that of the Union itself.[3] In a variation on the theme, Shahin Vallée suggests a temporary Corona Fund launched only by a coalition of willing member states, on the legal base of Article 222.[4] Sebastian Grund, Lucas Guttenberg and Christian Odendahl recommend a one-off ‘Pandemic Solidarity Instrument’ with liability shared between the Union and its states, on the legal base of Article 122.[5] Daniel Gros suggests exempting the poorer states from making their direct contributions to the revenue of the EU budget.[6] Michael Hüther and colleagues usefully recall the European Community’s first bond issue in response to the oil crisis in 1974.[7] Agnès Bénassy-Quéré and her colleagues are surely right to argue for a multiplicity of instruments which include short-term credit for those states most affected by the crisis and longer-term maturities at low interest rates for all.[8]

While all such schemes have merit, it will be important to avoid falling into the same contradiction that bedevils the existing Union structure. According to the principle of subsidiarity, where there is a pooling of risk between member states and when the Union is entrusted with the management of that risk, decision-making power should not be confederal, as it is in the ESM, but federal. If eurobonds are to be owned by the Commission, it is ridiculous to leave exclusive competence over fiscal policy to national governments.

Furthermore, the proposals on the table may be too small-scale in macroeconomic terms to prevent recession from tipping into depression. Bolder measures are called for – in particular, the launching of a genuine, federal eurobond whose immediate purpose is economic recovery, but whose lasting effect will be to strengthen the economic and political convergence of the Union.[9]

A federal recovery bond

The best solution is for the European Commission to issue a federal eurobond secured against the EU budget. This will require a significant rise – perhaps a doubling – in the current ceiling of own resources, set in 2014 at 1.2% GNI.[10] The recovery fund, created as a special purpose vehicle, will not be part of the EU budget, but the interest paid to bondholders will come from the EU budget. Revenue to cover those costs can be raised in several ways already proposed by the Commission, including a plastics tax, a digital tax, and proceeds from the carbon emissions trading scheme and a slice of a common consolidated corporate tax.

A federal eurobond will enhance the fiscal capacity of the Union without adding to national debt burdens, thus saving national treasuries money. The EU’s famous discipline of the balanced budget will be maintained.[11] Maturities offered should be lengthy to emphasise the significance of the first federal eurobond as an act of political and commercial confidence in the stability of the euro and the durability of the Union. The target would be to raise more than €1.5 trillion. At a time of deep uncertainty, the launch of the EU’s first federal bonds should be an attractive investment opportunity for governments, institutional and private investors.

The floatation of federal eurobonds is controversial, but it is far from being the first instance of real transfers of resources among member states. EU structural funds have been doing this for years, and the ECB’s monetary interventions have a similar non-uniform effect. Joint and several liability expressed through Union interventions in the market place is entirely consistent with the spirit of solidarity that imbues the EU Treaties.

Such an innovation will also resolve the otherwise intractable argument over the new MFF. A new own resources ceiling of, say, 2.5% GNI will give the Union all the fiscal space it needs over the next decade. The argument over a supplementary fiscal capacity for the eurozone will be redundant.

In the long run, fully mutualised debt security as a permanent fixture of EU fiscal policy will need the legal certainty that can only be provided by a formal, upwards shift of competence from the national to European level. Ultimately, a ‘sovereign’ Union means treaty change. The EU’s constitutional courts, led by the European Court of Justice, will tolerate nothing less. In the meantime, however, the special purpose vehicle of the eurobond recovery fund is the simplest and quickest solution, achievable without treaty change as part of the imminent decision about new own resources.[12]

Power shift

Creating a federal eurobond market will shift politics at the Union level, notably in favour of the Commission, which will be enriched as a powerful investor in world-leading technology, incentivising the Green Deal.

Two prominent members of the college, Paolo Gentiloni and Thierry Breton, are already calling for proper eurobonds. They will be supported by others, including Josep Borrell, Nicolas Schmit and Didier Reynders. Budget Commissioner Johannes Hahn also favours using the timely reform of the MFF to boost the Union’s treasury facility.[13] Valdis Dombrovskis leads the eurosceptic opposition in the Commission. President von der Leyen should encourage this debate and not seek to suppress it with sophistry. Her Commission will fail unless it summons up a robust response to the coronavirus scourge.

The failure of the Council to make sufficient progress in reforming the EU’s fiscal policy opens up an important opportunity for and helps to clarify the purpose of the Conference on the Future of Europe. This project, initially foreseen to start on 9 May, will not be able to begin until September at the earliest.

Before the coronavirus struck, there was little agreement between the European Parliament, Commission and Council about what the Conference was for. Some leading Members of the European Parliament hoped that the Conference would prepare for another round of judicious treaty revision. The Commission had no serious ambition for the Conference beyond a vague exercise in popular consultation. The Council was nervous that opening up the constitutional debate again would cause nothing but trouble.

The onset of COVID-19, however, and the inability of the Council to prepare seriously for economic recovery, have changed the context of the Conference. For one thing, the original, relaxed two-year timetable needs to be truncated.

Central to the purpose of the Conference should be to pick up where the EU institutions, left to their own devices, have failed to give expression to the need for solidarity between states and citizens, not least in the field of fiscal policy. How to share the burden between EU citizens as taxpayers should be high on the Conference agenda. A fluent Conference debate should serve to ease the necessary ratification of the new own resources decision by all national parliaments.


Andrew Duff is President of the Spinelli Group and a Visiting Fellow at the European Policy Centre. He was a member of the European Parliament 1999-2014. He tweets @AndrewDuffE


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[1] Eurogroup, Report on the comprehensive economic policy response to the COVID-19 pandemic, 09 April 2020.
[2] Herzenhorn, David M. and Sarah Wheaton, “How Europe failed the coronavirus test”, Politico, 07 April 2020.
[3] Government of the French Republic (2020), “Non-paper on possible EU and EA instruments to ensure financial stability and economic recovery”.
[4] Vallée, Shahin (2020), “Time for a Corona Fund: How a Coalition of Willing Member States Can Shore UP the EU Economy”, Berlin: German Council on Foreign Relations.
[5] Grund, Sebastian; Lucas Guttenberg and Christian Odendahl, “Sharing the fiscal burden of the crisis: A Pandemic Solidarity Instrument for the EU”, VoxEU, 05 April 2020.
[6] Gros, Daniel (2020), “EU solidarity in exceptional times: Corona transfers instead of corona bonds”, Brussels: Centre for European Policy Studies.
[7] Hüther, Michael; Peter Bofinger; Sebastian Dullien; Gabriel Felbermayr; Moritz Schularick and Jens Südekum; Christoph Trebesch, “Europe must demonstrate financial solidarity”, Köln: German Economic Institute, 30 March 2020.
[8] Bénassy-Quéré, Agnès; Giancarlo Corsetti; Antonio Fatás; Gabriel Felbermayr; Marcel Fratzscher; Clemens Fuest; Francesco Giavazzi; Ramon Marimon; Philippe Martin; Jean Pisani-Ferry; Lucrezia Reichlin; Hélène Rey; Moritz Schularick; Jens Südekum; Pedro Teles; Nicolas Véron; Beatrice Weder di Mauro, “COVID-19 economic crisis: Europe needs more than one instrument”, VoxEU, 05 April 2020.
[9] ‘Federal eurobonds’ to distinguish them from existing ‘eurobonds’ which are national bonds issued in foreign currencies. I avoid ‘coronabonds’ as distasteful.
[10] Council of the European Union (2014), Council Decision of 26 May 2014 on the system of own resources of the European Union, 2014/335/EU.
[11] Art. 310(1) TFEU.
[12] Art. 311 TFEU.
[13] Fleming, Sam, “Brussels seeks EU budget overhaul to boost post-pandemic recovery”, Financial Times, 08 April 2020.