One Policy is not Enough – Proposals for the EU

What is the EU's coherent response to the Corona crisis? For days the advantages of the ESM or Euro-bonds have been discussed. In the meantime there is a consensus that a single measure will not suffice.




7. APRIL 2020



The EU needs a solidarity-based economic policy response to the Corona crisis. What is now obvious in principle, however, still contains a number of question marks when it comes to its implementation. After much discussion in the economics scene in recent days and weeks about the pros and cons of euro or corona bonds and the negative connotation of the ESM, the EU finance ministers will meet on Tuesday and will have to make at least some form of decision. However, could it be that it doesn’t have to be an either or at all? Numerous economists are now arguing that one measure is not enough and that a good policy mix is needed.

For example, Tom Krebs (Uni Mannheim) argues at Makronom (ESM or Coronabaonds?) that “neither euro bonds nor ESM loans are a comprehensive – and sufficient – economic policy response to the Corona crisis.” In any case, he sees the differences between ESM loans and Euro-Bonds in a technical detail related to the interest payments on the loans. Krebs argues that the seniority of the Corona bonds would be subordinate, while ESM loans typically have senior status and thus must be serviced before interest payments on ordinary sovereign debt.

In the event of a sovereign debt crisis, the Corona Bonds would therefore only be redeemed after the national sovereign debt had been serviced.

This would probably be priced in by the financial markets, which is why the interest rate could be higher than for ESM loans with relaxed conditions, as envisaged by Krebs. In this case, all European countries involved would ultimately be worse off than with a relaxation of ESM conditionality. While the financing issue currently concerns the immediate crisis situation, Patrick Graichen (Agora Energiewende) joins Krebs in a guest article in Die Zeit (Investieren für den Tag X) on a suitable investment program for a way out of the crisis.

Graichen proposes a 100 billion euro program for Germany, which should take effect in several corners. He welcomes the EU Commission’s existing Green New Deal as a strong framework that now needs to be filled out. For example, Graichen calls for a €10 billion subsidy for the steel, cement and chemical industries to ensure that these key sectors are CO2-neutral by 2050. Preferential treatment in government projects should ensure the long-term viability of these new technologies.

Graichen sees further potential in an equity fund for municipal utilities to drive forward the decentralized energy transition. Agora Energiewende also sees enormous potential in the renovation of buildings by expanding serial renovation options through government funding. In addition to a 5 billion euro subsidy for heat pumps to replace one million oil-fired heating systems, Patrick Graichen also refers to the study commissioned by the Federation of German Industries (BDI) and the German Confederation of Trade Unions (DGB), which sees a 450 billion euro investment requirement for the state over the next 10 years.

Graichen refers to Franklin D. Roosevelt's New Deal. Roosevelt's New Deal, which was divided into three phases: "relief - emergency aid measures -, recovery - programs to revive the economy - and reform - far-reaching structural reforms.

Accordingly, all three phases would have to be considered even now.

A prominent international collective of economists (Bénassy-Quéré et al. 2020: COVID-19 economic crisis: Europe needs more than one instrument) also sees that one measure is not enough. They identify three fundamental aspects that need to be addressed: that the costs of the crisis be shared among all European countries, that all member states be helped, and that there must be an economic policy plan to lead the EU out of the crisis.

The first thing they propose is a COVID fund, which, in contrast to the euro bonds discussed years ago, would have as its goal only the management of the current crisis. The fund would be financed, for example, on the basis of the member states’ share of GDP. They propose that such a fund be set up for 10 years. In addition to comprehensive loan guarantees by the European Investment Bank (EIB), such as those provided at the national level by KfW in Germany, for example, the economists also advocate special loans within the ESM.

In addition to the SURE program already approved on April 2, which is intended to cushion the risks of unemployment, these specific ESM loans should grant more uniform interest costs for the member states. Moreover, the usual conditionality of ESM loans is to be relaxed and the maturity extended to 30 years. While the economists recognize that there needs to be a new financial instrument like a bond in the long run, they see the advantages in their proposals mainly in the fact that they are relatively easy to implement. Moreover, because the crisis affects many areas, a mix of measures has a higher probability of being effective at several crucial points.

The proposal by Grund, Odendahl and Guttenberg (A Pandemic Solidarity Instrument for the EU) addresses similar issues and also focuses on several measures that need to be implemented at the European level. While the EIB’s previous target was to provide 200 billion euros in liquidity support, they are calling for 1.8 trillion euros. 900 billion should be provided by the EIB (covered by 120 billion in EU guarantees) and the other half by national governments. They also call for a European introduction of the German short-time work system. Together with the financing of unemployment benefits, they see a need for 100 billion euros here.

At the fiscal policy level, the lion’s share of the investments must be made. The economists see a need for 2% of EU GDP, 65% of which should be financed by the EU. The additional 200 billion euros that result mean that the EU must provide a total of 440 billion euros.

Grund et al. call for a “Pandemic Solidarity Bond” with a maturity of 20 to 50 years. This bond should be backed by all member states and its structure should follow that of the European Financial Stability Facility (EFSF). However, the EU should be the issuer of the bond and service the claims. This would give the EU the power to act and mean that the debts deposited there would not be offset against the individual sovereign debts. As with Bénassy-Quéré, the financing of the bonds should be calculated in relation to the GDP of the member states.



The Corona pandemic poses new kinds of challenges for global economic and social policy making and has further intensified an already existing need for action. Economists are working hard on mitigating the economic effects.