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Eurobonds time has come

As so often in public policy, the European Council is in danger of fighting the last war. The easy dismissal of mutualised debt post 2010 is now revisited by northern EU Member States as though the same arguments apply. There are representatives of both sides of this argument in Renew Europe, my political group in the European Parliament.


Issuing Eurobonds would mean that all Member States would be responsible for anyone’s debt.


Progress on the Eurobond agenda, in spite of the lessons of the last recession, has been achingly slow. The European Parliament passed a resolution to ask the Commission to examine the options [CAN YOU CHECK THIS ROCIO]

Now, faced with its next crisis, the same questions hove back into view with an urgency like never before. Sadly, this past week the Eurozone has demonstrated a degree of paralysis the consequences of which could be felt very dramatically.


Imposing tough reform post-recession on countries like Ireland demonstrated an ideological inflexibility. However the Eurozone itself seems incapable of reform.


The failure to do so over the last decade was clear for all to see as the Eurozone ministers collapsed into useless and noisy argument last week. It really raises the question about whether the rhetoric about solidarity that falls so easily from leaders’ lips on set-piece occasions can be taken seriously.


What will likely happen now is that the benefits of the eurozone, capital flows from the centre to the periphery will work in reverse benefitting those countries bitterly opposed to economic solidarity. But in a single currency Italy can’t adjust its exchange rate to be more competitive. So what will the eurozone do to help? What we do know is the consequences of failure to help will destabilise Italy possibly even leading to an exit from the currency.


The politics of Italy make this possible with the Lega Nord having close ties with Russia and the much weakened 5 star movement close to China. So Italian banks hold a lot of Italian sovereign debt and this doom loop will spell trouble for everyone.


Germany and the frugal four have been blaming countries for always having high debt and budget deficits. However, it should be remembered that Ireland was running budget surpluses and had one of the lowest National Debts in Europe before the 2008 recession. Same goes for Spain. Germany repeatedly says the EU is not a transfer union whereas in the current MFF Poland benefits from Cohesion and structural funds to the tune of €40b.


On the other side of the ledger, Germany has benefitted from the introduction of the euro to a much greater extent than any other country. This is the finding of a study by CDU think tank the Centre for European Policy in February 2019. The only other country to have benefitted is the NEtherlands. On the other side, Italy has lost most from the introduction of the euro.


So what about the proposed alternative reforms. The European Stability Mechanism is a very positive step forward but will be inadequate to meet the needs post-crisis. It ‘lends’ to countries at low rates of interest. And it carries conditionality forcing Member-States into the humiliating and politically toxic practice of signing Memorandums of Understanding.


The risk of default, the main reason for opposing Eurobonds, is exaggerated. Creditor countries may actually suffer even larger losses without a well-designed system of mutualised debt. As former Dutch Central Banker Nout Wellink put it last week, “we are no longer a rich North if the whole South fails”.


Eurobonds would have to have safeguards and limitations including upper limits, long maturity and specific targets for investment. Decisions will also have to be made about targeting the funds coming in from such a debt issue. Spending on infrastructure related to the provision of health systems ensures that it is not frittered away on unreformed programmes in member states.


Much has been said about moral hazard. Fiscally-undisciplined Governments would be encouraged to run up larger and larger debts passing the risks and costs to disciplined Governments. It is the same argument that says we shouldn’t rescue people from the mediterranean in case it encourages more people to come.


Sometimes, particularly in an emergency, you have to look only at the innate rightness of some course of action. Too often people are overborne by the secondary consequences of a course of action and are then paralysed into doing nothing.


In this case, the hazard is there but not a moral one. Because no one is to blame for what has happened - certainly no EU country. The contrary may be true. Had such severe austerity not been visited upon so-called ‘programme’ countries, their health systems might be a lot more resilient today.


Don’t forget that a large portion of Italian, Irish and Spanish youth has already experienced long term unemployment in the last decade and a new generation might well experience it again in the years to come. And don’t be surprised if those young people blame the EU. I am not going provide political sanction for a repeat of the isolation of member states to their fate or to committing communities to their sad endurance of further austerity.


The European Council must urgently realise that the cost of doing nothing is much greater than the cost of doing something.


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