Eurobonds: A mirage for political unity within the Eurozone

Angela Merkel and Emmanuel Macron

Suchin Sampath

Suchin Sampath graduated with a BA in History from the University of Warwick, completing his dissertation on “The Chinese Democratic Movement: Before and After the Tiananmen Square Massacre, 1989.” Suchin is currently pursing a Masters in International Political Economy at King’s College London.

17th February 2021

John Thys/Pool//AFP/Getty

Over the past decade the European Union (EU) has faced intense political challenges, with the sovereign debt and immigration crises giving way to the rise of populist politics and Euroscepticism on the continent. Recently, pro-EU optimists have pointed to a changing political landscape in light of the Covid-19 pandemic, with member states moving from ‘an initial first-me response’ to a ‘politics of generosity.’ In a testament to the revived European spirit, Germany and Austria opened up hospitals to those coming from the worst afflicted countries whilst France donated masks so as to rectify the shortage in Italy. Such solidarity culminated, after extensive deliberations, in the announcement of a €750 billion EU Recovery fund to be financed via the issuing of Eurobonds. 


In reality, however, this was by no means the “Hamiltonian” moment yearned for by those who wish to see further federalism within the EU. Eurobonds only paper over the cracks that exist within the Eurozone as opposed to dealing with them, and it is imperative to address the long-term unsustainability of such a financing option for the recovery fund. 


What are Eurobonds and how do they work?


Eurobonds are effectively a macro-economic instrument by which the EU’s member states share the risk of borrowing debt. The EU would issue these AAA-rated bonds on the private market and back the debt against the bloc’s national budget. The purpose of this financing option is to make borrowing cheaper for poorer nations with high debt-to-GDP ratios, such as Italy and Spain, since the risk of defaulting is shared with the wealthier Eurozone countries with low debt levels.  


Underlying Euroscepticism still lurks


It would be foolish to assume that the renewed co-operative spirit at the EU level has vanquished Euroscepticism and populist politics alike, to which Hungary is perhaps the most profound testament. President Victor Orban has managed to strengthen the position of the populist right having propounded the need for a powerful central government to mitigate the damaging effects of the pandemic (Beauchamp, 2020.) Even where pro-EU governments have persevered, their political success appears rather limited and superficial. In France, for example, it is difficult to interpret Emmanuel Macron’s Presidency as a symbol for an overwhelming pro-European sentiment when life-long Eurosceptics, such as Marine Le Pen and Jean-Luc Mélenchon, remain prominent political actors within the region. Meanwhile, the shift in Germany’s political momentum, which has seen Chancellor Angela Merkel rally in the polls, can easily be attributed to a brief appeal for a rational political leader during the crisis. However, it is difficult to conclusively extrapolate this phenomenon to the post-recovery period; especially since the Christian Democrat’s gains have stalled as Europe moves on from the peak of the pandemic.


Furthermore, the malcontent of the “frugal four” (Denmark, Austria, Netherlands and Sweden) for a system of joint debt is striking. During the Eurogroup meeting in late March, Dutch Finance Minister Wopke Hoekstra was the source of controversy as he revived the “Southern Sinners” rhetoric, first mobilised against  the southern member states during the Eurozone crisis in an effort to portray these countries as fiscally reckless and thus in dire in need of austerity and structural reform. His comments were met with a vitriolic response by the Italian and Portuguese governments, illustrative of the prevailing rifts that have defined the Eurozone since the sovereign debt crisis a decade prior. The resulting recovery plan was one designed to accommodate the more austere values of the frugal nations, entitling member states to halt financial flows to countries deemed to be dishonouring budgetary commitments (Brunsden, 2020, pp. 1.) The inherent distrust between factions within the bloc remains evidently profound and should not be disregarded in spite of this “landmark” agreement. 


The long-term problems of fiscal mutualisation 


The substantial degree of fiscal mutualisation inherent within the establishment of Eurobonds will, most plausibly, only serve to re-empower Euroscepticism and far-right politics for two reasons. In the first place, risk-sharing can easily further rifts between member states and push nations back towards a “politics of me first.” This is of serious concern, owing in no small part to the reluctant spirit with which the frugal member states agreed to the conception of Eurobonds. Although this is relatively uncharted territory, one can reasonably expect that joint debt issuance is not politically viable when distrust guides policy-making and may be exploited by anti-establishment populist leaders.


Secondly, the repayment of the grants portion of the debt poses significant challenges to national sovereignty on the continent. Although a lack of clarity remains as to how exactly the repayment will be financed, preparations have seemingly paved the way for the transfer of considerable fiscal powers to the supranational level. Most notably, the EU’s plastic tax is to be introduced in 2021 whilst suggestions have already been forwarded for a new common corporate tax base and Financial Transactions Tax. It is highly conceivable that these emerging spill-over effects will be met with resistance in the post-recovery period as member states develop a malcontent regarding the loss of fiscal sovereignty. One may, for example, take the case of Ireland. Ireland possesses a national debt level at 57.4% of the annual GDP compared to that of Italy with a debt-to-GDP ratio of 134.7% (Eurostat, 2020.) Under a system of Eurobonds, Ireland will be borrowing at a higher interest rate than usual so as to accommodate the fiscal needs of southern member states such as Italy. However, Ireland will still be subjected to a new common corporate tax base that would predictably involve a significant divergence to the nation’s current tax structure, which at 12.5% is the lowest in the EU (IDA Ireland, 2020.) Thus, the prospect feasibly exists that wealthier member states will vehemently resist the transfer of fiscal stabilisers to the EU over the next few years, strengthening the narrative of Eurosceptic political groups that have long been gathering momentum. The wealthier member states are not of sole concern in this regard. One need merely look as far back as the rise of the Five Star Movement in Italy in the wake of the Eurozone crisis to witness the general influence of Euroscepticism and populism amongst a disenfranchised electorate.


Ultimately, the EU lacks the social and economic symmetry necessary for further integration and, hence, fiscal integration and debt mutualisation may pose more problems than solutions for the cultivation of Europeanism in the long-term. 




Eurobonds are very much a short-term fix to the economic crisis, seizing the opportunities presented by a revived European spirit, but do little to resolve prevailing divisions within and amongst member states. If anything, they quite evidently possess the capacity to precipitate further strife and unrest within the region. Policy-makers must recognise that they have merely bought themselves time and that the very real risk remains for the breakdown of the recovery fund, potentially further empowering populist parties and enlarging rifts within the bloc.  





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