Corona Bonds Bring No Significant Relief for Italy

A ‘European Recovery Fund’ (ERF) of 1.5 trillion euros would not be able to significantly help highly indebted euro countries such as Italy and Spain to cope with their rapidly increasing national debt. Even financing the fund through corona bonds would not bring any notable additional relief. This is the result of calculations presented by Professor Friedrich Heinemann, Europe expert at ZEW Mannheim, on the possible distributional effects of an ERF.

The analysis is based on the assumption that the fund’s resources will be allocated to all EU countries according to two criteria: first, the severity of the recession in 2020 and second, the number of COVID-19-related deaths. It further assumes that member states will have to pay contributions to finance the ERF in proportion to their share in the EU’s Gross National Income (GNI), as in the current EU budget. The ZEW expert brief also calculated the interest rate advantage for countries with a below-average credit rating if the ERF’s financing costs are shifted into the future, as would be the case with corona bonds.

According to current projections regarding the severity of this year’s recession and coronavirus-related death figures, Sweden, the Netherlands, Estonia, Spain, and Italy would be among the most favoured net recipients. Net contributors would mainly be the Eastern European EU states, including particularly poor countries such as Romania and Bulgaria.

However, the net benefits expected for Italy and Spain are very limited. For Italy, they would amount to merely 3.4 per cent of its gross domestic product over the entire lifetime of the fund. Given that Italy’s national debt was already at 135 per cent of the country’s GDP before the crisis, this would not bring any significant relief. Even corona bonds would hardly relieve the country financially. For Italy, the improved financing conditions would result in annual savings of only 3.1 billion euros, little more than one per mille of the current national debt.

“The European Recovery Fund is unable to solve the problem for which it was invented,” says author of the study, Friedrich Heinemann. “This assessment would only change if highly indebted countries were permanently exempted from paying their share in the new fund, or if the corona bonds were also used to refinance the existing stock of national debt. Perhaps this is the unspoken expectation of the governments in Southern Europe. However, in view of the high financial burden that would then be shifted to Northern and Eastern European states, this is highly unrealistic,” says Heinemann.