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Is Macron Right to Say That Coronabonds Will Save the Eurozone?

French President Emmanuel Macron provided a stark warning to his EU counterparts on Friday as he warned that the bloc is facing a “moment of truth.” He is arguing that the COVID-19 crisis has strengthened the need for greater solidarity among EU member states, particularly those nations that are most vulnerable to the economic effects of the virus, which includes Spain, Italy and Portugal.

The French leader added that now was the appropriate time for coronabonds to be issued which would pool member states’ debt and lessen the burden on them. The bloc could then issue common debt with a common guarantee. However, Austria, the Netherlands and Germany all oppose this plan.

The Disagreement Over Coronabonds

As the European Commission’s President Ursula von der Leyen was forced to issue a heartfelt apology to Italy for the way that the EU has responded to the country’s plea for help during this time, Macron believes that if the bloc cannot agree to issue indebted nations with coronabonds, it will spell the end of the eurozone.

Earlier this month, EU finance ministers finally managed to agree upon a £438 billion support package for nations most affected by the pandemic and they will benefit from €240 billion of credit lines via the European Stability Mechanism. Yet these measures have failed to stem the continuing tensions between northern and southern European countries over coronabonds.

Coronabonds Can Either Save or Sink the Eurozone

As Bloomberg‘s Andreas Kluth argues, the coronabonds can either save or sink the eurozone. Nations such as Spain and Italy, which are suffering the most from the coronavirus, would get cheaper access to the money they need to recover. Germany, which borrows at negative rates, would only pay trivially higher interest costs. Yet these situations are never that easy.

The tax revenues to repay the bonds would still be generated by the individual member states, and national legislatures would decide how to tax and spend. Northern European countries may fear that the southern parliaments may tax too little and spend too much, knowing that it would be nations like Germany that would have to repay their creditors.

Where Does the Eurozone Go Next?

Kluth highlights that there are two ways the eurozone could be destroyed in the future. The north balks at all forms of debt issuance, which would then lead to a surge in support for politicians like Matteo Salvini, who takes his country off the euro and accepts cash from China.

Alternatively, because many northern European countries resent having to pay for the south through a transfer union, northern nationalist governments could end up quitting the eurozone instead.

In theory, the eurozone needs a government that can issue bonds and levy taxes, but there is no guarantee all the EU member states can agree upon creating one, especially if more nationalist governments are elected in the future.

Either way, Macron is right a profound agreement has to emerge from this crisis, otherwise the fragile EU’s chances of collapsing will increase.

Eurozone Leaders Have Limited Options

Italy’s dilemma also raises the possibility of a parallel currency emerging in the future. The Bruges Group’s spokesman Robert Oulds explained to that because of the north’s reluctance to finance coronabonds, the Italian Government must look at issuing a parallel currency to prepare for a gradual exit from the eurozone.

He added that if the EU forces Italy to raise its taxes and cut spending, their economy is only likely to worsen, which is why a parallel currency is so necessary.

Regardless of which path eurozone leaders take, either one has risks and could result in a surge of nationalist support north or south of the EU. Further steps toward integration are likely to fall upon deaf ears in nations such as Poland and Hungary. Right now EU leaders are damned if they do and damned if they don’t.