Merkel backs EU bonds to fight coronavirus crisis

German chancellor backs use of existing solidarity clause to share risk.

German Chancellor Angela Merkel | Pool photo by Andreas Gora/EPA

German Chancellor Angela Merkel said Monday she is in favor of issuing EU bonds via an existing clause in the union’s treaties to finance the bloc’s economic recovery from the coronavirus crisis.

Speaking to reporters in Berlin, Merkel said the solidarity clause — under Article 122 of the EU treaties, which has already been used to propose a temporary unemployment reinsurance scheme — could be used to finance other forms of financial assistance for national governments.

But she remained skeptical toward the idea of a broader pooling of debt risk via the so-called corona bonds that southern countries such as Italy demand.

“We have already found an instrument in Article 122, paragraph 2, where bonds for countries can be passed on by means of guarantees from member states and then used, for example, to finance short-time working allowances,” she said, adding: “I can also envisage such instruments in the future.”

The chancellor’s remarks come ahead of a videoconference of EU leaders on Thursday, where they plan to endorse a first package of about €500 billion of financial assistance and also discuss plans for an additional recovery fund to cushion the economic fallout of the crisis.

Merkel’s comments lend support to an idea already being proposed in Brussels that would — unlike corona bonds — see the Commission issue bonds based on financial guarantees provided by countries through the EU budget. That could limit the amount of shared risk, and would also be designed to be temporary.

European Commission President Ursula von der Leyen already floated the idea that the Commission could seek to raise the cap on how much money Brussels can ask countries to commit to the EU budget, and then use the extra so-called headroom to raise money in the markets.

“I can well imagine that the budget does not, of course, look like the one we discussed the last time,” Merkel said Monday, referring to the February European Council summit, where leaders failed to reach an agreement on the bloc’s 2021-2027 spending.

“This budget will look different,” she continued. “I can well imagine that it will have to have quite different financial possibilities in the first years after the pandemic, but that too must be within the current treaties.”

Merkel expressed sympathy with the position of countries such as Italy, stressing that the need for financial assistance was not the result of shortcomings in economic policy but “a pandemic that has come upon us.”

“Germany not only wants to show solidarity, but will show solidarity,” the chancellor said.

However, in a veiled reference to Southern Europe’s push for corona bonds, Merkel suggested the plan is not practical because it would take too long to set up. The idea has been heavily and publicly opposed by the Netherlands on the basis it would involve taking on too much risk on behalf of others.

“We can also discuss new contracts, but then it will take two to three years to find solutions,” she said. “And we will need rapid responses to this pandemic. Germany will participate in solidarity-based responses — over and above what we already have with the €500 billion.”

Lili Bayer contributed reporting.

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