Context:Nine of the 19 countries in the Eurozone called recently for a common debt instrument issued by a European institution to fight COVID-19.
More about the news:
- Revival of earlier debate in Eurozone:
- The coronavirus pandemic has revived the debate between eurozone countries about jointly issuing debt to meet healthcare needs and address the deep economic downturn that is set to follow.
- Reluctance of northern countries:
- The northern nations prefer to stick to existing financial relief facilities.
- These nine countries in the south are prone to calling for the mutualisation of European national debts, while richer countries in the north of Europe usually oppose such measures.
- The current idea of such debt, called “coronabonds”, was rejected by Germany, the Netherlands, Finland and Austria and several fiscally “frugal” northern European states.
- Origin of the idea of joint debt issuance:
- It was previously raised by Italy, during the 2009 global financial crisis, and by France and Italy in 2012, at the peak of the euro zone’s sovereign debt crisis, and dismissed by Berlin and its allies.
Details about proposal of CoronaBonds
- The proposal of coronabonds is to come up with new funding to counter the economic fallout of the Covid-19 pandemic, which has most people in the EU confined to their homes and has caused the global economy to grind to a virtual standstill.
- It is a new instrument that would combine securities from different European countries.
- A bond, essentially an IOU(a document that acknowledges a debt owed)with a serial number, is issued by governments or companies in need of money.
- Bonds expire after a fixed amount of time and generate a fixed interest, that is usually paid twice per year.
Various options available for mutualisations in Europe
- European Stability Mechanism:
- It is the existing possibility of Euro Zone jointly issued debt.
- The euro zone jointly issues debt through its bailout fund, the European Stability Mechanism.
- It borrows on the market against the security of its paid-in and callable capital provided by eurozone governments.
- The fund, together with its predecessor EFSF, issued such debt to bail out Greece, Ireland, Portugal, Cyprus and Spain during the sovereign debt crisis
- European Financial Stability Mechanism (EFSM)
- It is the existing possibility of European Union jointly issuing debt.
- This debt is backed by all 27 European Union countries through the bloc’s joint long-term budget.
- It may issue 100 billion euros of debt backed by 25 billion euros of guarantees from member states, to finance wage subsidies in all EU countries as part of a short-time work scheme modelled on the German “Kurzarbeit” plan.
- European Investment Bank (EIB) borrowing
- The EIB is the investment arm of the EU.It is owned by EU governments and issues around 60 billion euros of debt every year to lend for various projects in the bloc.
- The formation of the European Union (EU) paved the way for a unified, multi country financial system under a single currency, the euro.
- While most EU member nations agreed to adopt the euro, a few, like the United Kingdom, Denmark, and Sweden (among others), have decided to stick with their own legacy currencies
- There are 27 countries in the European Union, but 8 of them are not in the eurozone and therefore don't use the euro.
- These are countries where the euro has still not been adopted, but who will join once they have met the necessary conditions.
- Mostly, it consists of countries of member states which acceded to the Union in 2004, 2007 and 2013, after the euro was launched in 2002.
- These countries are as follows
- Czech Republic