US, WASHINGTON (ORDO NEWS) — European Commission President Ursula von der Leyen announces that Europe will need about 1 trillion euros to fight the Covid-19 pandemic. This money can be used to create the European Recovery Fund. But where does this money come from?
I propose that the European Union raise funds necessary for the Recovery Fund by selling “perpetual bonds”, which do not need to pay the principal amount (although they can be redeemed or repaid at the request of the issuer). Permission to issue them should be number one priority at the upcoming European Council Summit on April 23.
The issue of perpetual, perpetual bonds, of course, will be an unprecedented step for the EU, especially in such large volumes. But in the past, other governments have resorted to similar perpetual bonds. The most famous example is Great Britain, which used consolidated bonds (the so-called “consols”) to finance the Napoleonic Wars and military bonds to finance the First World War. Issues of these bonds were traded in London until 2015, when they were repaid. And in the 1870s, the US Congress allowed the Treasury to issue “consoles” for the consolidation of existing bonds, and, indeed, such bonds were issued in subsequent years.
The EU is waging a once-in-a-lifetime war on a virus that has endangered not only people’s lives, but also the very survival of the EU. If EU member states begin to defend their national borders from their EU partners, the principle of solidarity on which this union is built will be destroyed.
Instead, Europe needs to take extraordinary measures to cope with an extraordinary situation that has hit all EU countries. And you can not be afraid of creating a precedent that would justify the issue of common EU debt obligations as soon as the normal situation is restored. The issuance of bonds demonstrating faith in the EU and its creditworthiness will provide political support for what the European Central Bank (ECB) is already doing: it has eliminated almost all the restrictions for its bond purchase program.
Perpetual bonds have three additional benefits that make them suitable for current circumstances.
Firstly, perpetual bonds do not need to be repaid, so they create an incredibly light budget burden for the EU, despite the significant financial firepower that they are able to mobilize. The European Union does not need to refinance them when the maturity is approaching, it does not need to return the amount of the principal debt (the so-called depreciation payments), and it does not even need to save money (for example, to the depreciation fund) for their future repayment.
The EU will only be required to regularly pay interest on these bonds. Perpetual bonds worth 1 trillion euros with a coupon of 0.5% will cost the EU budget only 5 billion euros per year. This is less than 3% of the EU budget for 2020.
The second advantage is more technical, but it is almost equally important. Most likely, the market will be unable to immediately and completely swallow the issue of bonds for 1 trillion euros. By placing perpetual bonds, the EU can raise the required amount in tranches without creating new bonds each time.
A third advantage is that eternal bonds issued by the EU will be a very attractive asset for the ECB bond purchase program. Since the maturity of perpetual bonds is always the same, the ECB will not have to rebalance its portfolio.
The EU does not need to create any new mechanisms or structures for issuing these bonds, because the EU has already issued bonds in the past. Proceeds from their sale should be used for investments and grants aimed at combating the pandemic.
The European Commission can distribute these funds either directly or through the governments of the EU countries and other institutions (for example, municipal authorities) that are directly involved in the fight against the Covid-19 pandemic.
The failure caused by this pandemic should be temporary, but it will only be so if the European leaders take the extraordinary measures necessary to prevent long-term damage to the EU. That is why the EU is in dire need of the Recovery Fund. Perpetual bond financing is the easiest, fastest, and least costly way to create one.
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