Eurobonds are the ultimate blow to incentivising economic growth

The European Ministers of Finance have recently decided to make 280 billion euros available to aid the Italian healthcare sector. However, the Italian minister does not want to accept this support. He wants to receive Eurobonds instead. Are debt instruments like Eurobonds a good idea? 

What are Eurobonds?

Eurobonds, at times referred to as 'coronabonds' due to the coronacrisis, are instruments that allow governments to jointly finance debt. For financially stronger member states, the cost of funding these increases when weaker member states are able to leverage their creditworthiness, which in turn removes an important incentive for these countries to implement sound fiscal policies in the long term. Germany and the Netherlands have been vocal opponents of financing Eurobonds for this reason.

No incentive for economic improvement

According to Mary Pieterse-Bloem, Professor of Financial Markets and Global Head of Fixed Income at ABN AMRO, and Sylvester Eijffinger of Tilburg University, Eurobonds can deter countries in putting their economies on a higher growth plan. 

Spain has recently proposed using perpetual bonds to finance a European recovery fund. The only difference between perpetual bonds and Eurobonds is that national governments directly guarantee Eurobonds and indirectly guarantee perpetual bonds via a joint European budget. The bottom line is that both bonds do not provide any incentive to structurally improve economic stability after a crisis, nor do they serve as motivation for economic growth. Growth which will be essential to carry the financial burden the corona crisis will leave on the European Union. In Italy alone, the government debt ratio stood at 135% before the crisis and is expected to reach 155% by the end of this year. 

Because of the enormous public debts of mainly Southern European countries, it is essential that the growth rates of these countries are higher than their interest rates. This has not been the case in Italy for a long time. Italy will have to focus on growth in order to finance the large debt the country will undoubtedly have after the crisis. The conditions that the Netherlands wants to impose on the provision of economic aid are aimed at motivating focus on growth, but these conditions are also the main cause of recent frictions between Northern and Southern Europe.

Temporary purpose, permanent existence

History has indicated that previous emergency instruments with a supposedly temporary purpose still exist today. Therefore, it can be expected that the perpetual bonds proposed by Spain will also continue to exist after the crisis. It is also very likely that these perpetual bonds will eventually be bought by the European Central Bank. This is an easy way for countries to have debt disappear from their balance sheets. 

Creative destruction

The corona crisis, like crises before it, has shown to be disruptive in terms of Joseph Schumpeter's process of creative destruction: old techniques make way for new ones. On a national level, for example, universities and schools have massively introduced online education. Many restaurants are delivering meals and drinks for the first time. Supermarkets and shops are also adapting their business models. Governments should not try to save old models and methods which they believe keep economies running. Instead, they should aim to embrace new models that have emerged in times of crises. Creative destruction is a driving force of economic growth which compels countries to look at the status quo and drastically reform it instead of trying to save it as it is. 

Professor
Mary Pieterse-Bloem, Professor of Financial Markets