The appropriate European response to the coronavirus crisis is currently intensely debated, with European Stability Mechanism (ESM) loans and coronabonds being the most important alternatives (e.g. Bénassy-Quéré 2020a, Bénassy-Quéré 2020b, Bofinger et al. . 2020, Erce et al. 2020, Grund et al. 2020). One of the arguments against the Coronabonds – a single mutual European bond issue – is that it would be an unprecedented step and break a dangerous taboo.
This column adds to the debate by showing that bonds issued and guaranteed jointly by European states are not a new instrument but have been issued several times since the 1970s. We summarize the forgotten history of European Community bonds and the use of joint European debt issues in the fight against deep economic crises in Horn et al. (2020a). It is little known that before the instruments created during the euro crisis, such as the ESM, Europe relied on a series of earlier crisis response instruments and cooperation mechanisms, as we have seen. document in an ongoing research project on official international loans (Horn et al. 2020b).1
The oil crisis and the 1975 community borrowing mechanism
One of these little-known instruments is the community bond, triggered by the 1973 oil crisis (James 2012). The oil crisis was a profound shock to European states, both economically and politically, and was seen as an existential threat to economic union (Diekmann 1990). Italy was particularly hard hit and entered a deep recession, with a GDP growth rate of -2% in 1975.
In response to the crisis, the so-called Community Loan Mechanism (CLM) was set up in February 1975 with the aim of issuing European Community bonds on private capital markets to support countries in crisis. The German government played a central role in creating this mechanism and also added a bilateral loan of $ 2 billion to Italy in 1974.
The program complements the European Medium-Term Financial Assistance Mechanism (MTFA) created in 1971 and makes it possible to provide direct financial assistance through intergovernmental loans, without placing Community loans on the private market. The main objective of these programs was to cushion the balance of payments difficulties caused by external shocks through intra-European financial cooperation and to provide assistance to countries affected by the crisis in Europe in order to limit their dependence on loans from the European Union. IMF and US Federal Reserve. (Kruse 1980).
Figure 1 Design of the 1975 community loan mechanism
Source: EEC Council (1975a), EEC Council (1975b), own illustration.
The basic design of the Community loan mechanism was as follows: the European Commission would obtain Community loans on behalf of the European Community. The Council of Ministers, which represents the governments of the Member States, took all relevant decisions, while the Commission acted as the executive body. To raise funds, the Commission negotiated with private investors and presented the results to the Council of Ministers. The loans were then transferred to the central banks of the countries affected by the crisis via the Bank for International Settlements (BIS), which acted as agent. Figure 1 summarizes the design graphically.
As to the structure of the liabilities, the Commission guaranteed repayment to private creditors through its budget. In addition, the mechanism included a guarantee commitment on the part of the Member States, according to fixed quotas. The maximum credit volume was set at $ 3 billion in 1974 and the guarantee increased to a maximum of 200% of this credit limit. The 200% double guarantee was designed as a buffer against payment problems by one of the guarantor Member States. For example, under the program, Germany had an initial guarantee share of 22% and therefore assumed a maximum guarantee of 44%, or $ 1.32 billion in total (Stieber 2015). The volume of the program was then considered significant and, in the case of Italy, exceeded the financial resources provided by the IMF.
A survey of European Community loans and their beneficiaries
In 1976, the first European Community bond was placed on the private capital markets, with funds loaned to Italy and Ireland. Other community bonds were distributed to Italy (1977), France (1983), Greece (1985) and Portugal (1987). In the 1990s, community bonds were issued in favor of Greece (1991) and Italy (1993). The mechanism was merged with the EU’s balance of payments facility in 1988 and, in 2002, was limited to countries outside the euro area. It was activated again in 2008/2009 to support Hungary, Latvia and Romania. In addition, the European Financial Stability Fund (EFSF) and the ESM were created after 2010 to support members of the euro area.
Table 2 gives an overview of European Community loans by year and by recipient country. The EFSF and MES loans granted to Cyprus, Greece, Ireland, Portugal and Spain during the 2010-2013 crisis are not listed, as they are much better known and well documented (for more for details, see Corsetti et al. 2017).
Table 2 Overview of European Community loans since 1974
Remarks: The table presents a summary of the European Community borrowing programs financed by Community bonds. In columns 4 and 5, the authorized loan amount is modulated by the GDP and the foreign exchange reserves of the year preceding the crisis. CLM: Community Loan Mechanism, MTFA: Medium-Term Financial Assistance Facility, BoPF: Balance-of-Payments Facility.
Source: Horn et al. (2020b)
Courses for today
How strong are the parallels with today? Most of the current Coronabond or Eurobond proposals involve joint and several liability of all Member States. This would go a little further compared to the Community loan mechanism of the 1970s, which involved national guarantees with maximum quotas. Nonetheless, there are important lessons to be learned from our review of European credit practices since the 1970s.
An important idea is that from time to time the EU budget played a central role in European bond guarantee systems. Direct guarantees from Member States served only as a second level of guarantee, which would be activated if EU funds were not sufficient (CLM rules until 1981). It is therefore not surprising that the current proposals also suggest using a future (enlarged) EU budget to guarantee repayment of potential Coronabonds.
Second, there is room for optimism in the story: the European Community bonds we studied were all repaid in full and on time, and the guarantees were never activated.
The third and most important lesson is the big picture: in deep crises, European governments have repeatedly shown their willingness to extend rescue funds as well as substantial guarantees to other members in need. The necessary institutional arrangements have often been put in place in a flexible and rapid manner. Coronabonds would thus be part of a long tradition of European financial cooperation and solidarity.
Erce, A, A Garcia Pascual and R Marimon (2020), “ESM Can Fund COVID Fight Now», VoxEU.org, April 6.
Bénassy-Quéré, A, A Boot, A Fatás, M Fratzscher, C Fuest, F Giavazzi, R Marimon, P Martin, J Pisani-Ferry, L Reichlin, D Schoenmaker, P Teles and B. Weder di Mauro (2020a), “COVID-19: A Covid line of credit proposal», VoxEU.org, March 21.
Bénassy-Quéré, A, G Corsetti, A Fatás, G Felbermayr, M Fratzscher, C Fuest, F Giavazzi, R Marimon, P Martin, J Pisani-Ferry, L Reichlin, H Rey, M Schularick, J Südekum, P Teles, N Véron and B Weder di Mauro (2020b), “COVID-19 economic crisis: Europe needs more than one instrument», VoxEU.org, April 5.
Bofinger, P, S Dulline, G Felbermayr, M Huther, M Schularick, J Sudekum and C Trebesh (2020), “To avoid an economic catastrophe, Europe must show financial solidarity”, NewStatesman, March 21.
Corsetti, G, A Erce and T Uy (2017), “Official strategies for lending to the sector during the eurozone crisis”, Review of international organizations, future.
Diekmann, B (1990), Die Anleihe- und Darlehenstransaktionen der Europäischen Gemeinschaften, Finanzwissen-schaftliche Schriften Nr. 41, Frankfurt am Main: Lang.
EEC Council (1975a), “Council Regulation (EEC) No 397/75 of 17 February 1975 on Community loans”.
EEC Council (1975b), “Council Regulation (EEC) No 398/75 of February 17, 1975 implementing Regulation (EEC) No 397/75 on Community loans”.
Grund, S, L Guttenberg and C Odendahl (2020), “Sharing the tax burden of the crisis: an instrument of solidarity in the event of a pandemic for the EU», VoxEU.org, April 5.
Horn, S, J Meyer and C Trebesch (2020a), “European Community Bonds since the Oil Crisis: Lessons for Today?», Kiel Policy Brief n ° 136, April.
Horn, S, C Reinhart and C Trebesch (2020b), “Coping with Disaster: Two Centuries of International Official Lending”, Mimeo, forthcoming.
James, H (2012), Making the European Monetary Union, Cambridge, USA: Harvard University Press.
Kruse, DC (1980), Monetary integration in Western Europe: EMU, EMS and beyond, London: Butterworth-Heinemann.
Stieber, H (2015), “European Mechanisms for Macro-Financial Solidarity 1971–1993: Balance of Payments Support Between the End of Bretton Woods and the Launch of EMU”, European Commission, Brussels.
1 A VoxEU column summarizing this search can be found here.