As the EU devises a fiscal response to Covid-19, Irene Monasterolo and Ulrich Volz outline a combined bond issuance plan that also expands the Green Deal.

To address the Covid-19 crisis in a shared and effective way, a rapid and large-scale fiscal response from all EU member states is needed. However, responses have been uneven so far, reflecting the different ‘fiscal space’ – or budgetary room for manoeuvre – of member countries. This political impasse could also prevent a cohesive and climate-aligned recovery, in particular in the worst-affected and most financially vulnerable countries.

EU institutions have taken some important initiatives. The European Central Bank introduced the new pandemic emergency purchase programme of €750bn, while the European Investment Bank (EIB) launched a €25bn guarantee fund to address EU companies’ liquidity shortages.

On April 9, via the Eurogroup, eurozone finance ministers agreed on pandemic credit lines from the European Stability Mechanism, which can be used without conditionality to finance healthcare, cure and prevention, amounting to 2% of a member country’s gross domestic product (GDP). Moreover, it agreed on a new €100bn loan scheme to help member countries to mitigate unemployment risks. An agreement was also reached on a capital increase for the EIB.

These are important contributions to stabilise markets – but will not be enough to address a sustainable and inclusive EU recovery.

Divisions showing

The Eurogroup divisions over risk sharing and the recapitalisation of the EIB showed the world a divided image of the EU, and a short memory of the lessons of the eurozone crisis. Germany and the Netherlands continue to refuse the proposal of issuance of Eurobonds by the EU institutions made by nine EU governments, while the Italian government’s support for the Eurogroup rescue deal sparked a backlash in Italy.

For EU member states with low fiscal space and high debt, financing the Covid-19 response implies a trade-off between fiscal and financial stability, and delivering on the EU’s climate targets. Indeed, proposals that would raise countries’ debt-to-GDP ratio would worsen debt sustainability problems, with implications for countries’ prospective development.

Importantly, they would inhibit crucial investment in climate adaptation and mitigation, with implications on future socioeconomic and financial stability. The fiscal implications of today’s crisis responses will determine not only the future of the eurozone, but also the EU’s ability to meet its climate goals. 

Dual bond plan

We propose an approach that operationalises EU solidarity in responding to the Covid-19 crisis while exploiting the synergies of EU instruments to also address the impending climate crisis. Our proposal entails the coordinated issuance of Covid-19-related bonds by the European Commission (EC) and Green Deal bonds by EIB.

The EC would issue Covid-19 crisis-conditioned bonds, the proceeds of which would be used exclusively for funding an immediate and comprehensive emergency response across the EU to cushion the short-term economic and social implications of the Covid-19 crisis. The bonds would go on the market and everyone could purchase them.

At the same time, the EIB would issue new Green Deal bonds that support projects in the Covid-19 reconstruction phase via structural investments aligned with the Green Deal carbon-neutrality targets. The new agreement on an increase of the EIB’s capital would extend its ability to raise private capital by exploiting its AAA rating and thus low-rate financing on international markets.

The Green Deal bonds could be used to finance both climate-aligned private investments as well as strategic pan-EU infrastructure investment, including rail lines, at a low cost to support the recovery phase in all member countries.

Threefold benefits

Our proposal has three main advantages. First, it would operationalise the call for EU solidarity via a common debt instrument, without the need for direct monetary financing. This, on the one hand, would contribute to avoiding moral hazard by individual member countries, and on the other hand, it would avoid the risk of a new debt-led financial crisis in the EU that would likely blow up the eurozone.

Second, it would avoid compromises between using scarce national resources for either Covid-19 response measures or Green Deal investments, and ease the public debt burden of member states, thus preserving financial stability at the individual and eurozone level.

Third, it would foster a deeper integration of EU institutions, opening the way to a responsible shared management – among both member states and generations.

Irene Monasterolo is an assistant professor of climate economics and finance at the Institute for Ecological Economics, Vienna University of Economics, and visiting researcher at the Frederick S Pardee Center for the Study of the Longer Range Future at Boston University. Ulrich Volz is director of the Centre for Sustainable Finance and reader in economics at SOAS, University of London.


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