Stabilisation in the crisis: ESM versus Eurobonds

How to ensure the necessary fiscal flexibility for EU-countries? Leading economists debate whether the financing of government action should be ensured through the ESM or joint Eurobonds.




24. MARCH 2020



It is common sense by now that the coronavirus has led to the need of a strong fiscal answer to the looming recession. Leading economists debate whether a European answer should be designed through the European Stability Mechanism (ESM) or through Eurobonds that would basically mutualise the debt of EU-members. A collective of leading economists, among them Agnès Bénassy-Quéré, Marcel Fratzscher, Clemens Fuest, Francesco Giavazzi, Jean Pisani-Ferry, Beatrice Weder di Mauro, advocates for a Covid Credit Line.

They argue that “It is definitely in the interest of each Member state that a hard-hit country takes the necessary measures to control the pandemic.” But while they admit that a Eurbond would be an appropriate answer, they doubt that such a mechanism could be established as urgently as the crisis demands it. They fear that without a special European Covid Credit Line (ECCL) in the ESM, the European answer will lag behind the initiatives of the US and the UK. With the fear of overburdening the ECB with the task to mitigate the risks of the crisis, they call for another joint European project.

The Design of the Covid Credit Line

“It can lend only for one year, with possible extensions up to another year. A better alternative would be for the ESM to create a new, dedicated Covid Credit Line with a long duration, access conditions and ex-post conditionality. It should grant to all member states long-term credit lines dedicated to the financing of the Covid relief effort. Allocation across member states should be proportionate to the severity of the public health and economic challenges encountered. Conditionality should be minimal and consist in member states committing to be transparent in the use of the Covid Credit Line and not to introduce new discretionary spending or tax reduction measures that are not Covid-related as well as to wind down the Covid relief effort once the crisis is over. The duration of these credit lines should be very long because member states will emerge from the Covid crisis severely weakened and will not be in a position to repay soon. And the alternative of replacing ESM credit lines with newly issued domestic debt would frustrate the exercise. Consistently, the new bonds issued by the ESM should be of very long maturity, though at maturities that have a market.

This option would represent a concrete improvement in comparison to the current situation. The ESM has currently a €410 billion lending capacity (3.4% of euro area GDP), which can be increased by the Board of Governors.

It would still involve little coordination and solidarity among member states, as each of them would remain sole responsible for its debt vis-à-vis the ESM. But a Covid Credit Line would help sustain the members’ effort, it would help make the corresponding borrowing cost independent of individual fiscal situations. Rising the volume of European (ESM) bonds would also be stabilising for the financial sector and would broaden the scope for ECB action. “

The full article on VoxEU can be found here: A proposal for a Covid Credit Line

The case for Eurobonds

A collective of german economists also calls for joint European fiscal action to mitigate the economic consequences of the corona-crisis. Jens Südekum, Gabriel Felbermayr, Michael Hüther, Moritz Schularick, Christoph Trebesch, Peter Bofinger, Sebastan Dullien call for the EU as a ‘community of destiny’ in which the strong now have to support the weak.

In order to stabilise financial markets, they call for quick action and point to the detrimental outcome of hesitant and late policymaking during the Euro crisis as a warning example. The specific policies should be determined by each country on its own and are detailed in other articles but the question is how to finance these policies in the EU. The German economists argue that only joint Eurobonds in the scale of 1 trillion Euro can successfully cope with the fiscal necessities of the crisis. This way, European countries would de facto mutualise their debt.

Only this way, the economists argue, can EU handle the parallel supply and demand shock and can prevent another solvency crisis.

The one trillion Euro could be used whenever countries are at risk to lose access to capital markets. These emergency bonds should only be used as the last resort but would grant struggling countries relatively cheap credits. The duration of these credits should be as long as possible and the payback mechanism should orientate on the share that the member-states possess of the capital of the ECB.

The economists argue that this way, the downward pressure of banks and insolvent countries is lessened. While they generally neglect the ESM to cope with this problem, they argue that it could be the emitter of such Eurobonds since no unanimous approval of every EU-country would then be necessary.

In addition to the 750 billion Euro emergency plan of the ECB, the collective of economists also advocates for a temporary set-off of the requirements of the ESM in order to show speculators that government solvency is entirely ensured. In order to provide the necessary capital for the safety of the banking system, they also call for an increase of 140 billion Euro of the ESM. They urge, that speculation has to be prevented and that an adequate answer to the crisis has to come as quickly as possible.

To the full article in the FAZ: Europa muss jetzt finanziell zusammenstehen.



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.