European leaders still come up against the debt issue again and again. With the coronavirus, it becomes a real headache. After a summit in Brussels to develop the economic response to Covid-19, Thursday, April 23, the Spanish proposal to issue perpetual debt to finance the reconstruction effort was not retained. The heads of state and government have postponed the main issues until later.

However, the idea submitted by Madrid a few days before this meeting had received the support of Italy and, to a lesser extent, that of France. The philanthropist financier George Soros also applauded this initiative, as did the former candidate for the presidency of the European Commission, the Belgian Guy Verhofstadt. Even the very liberal British daily Financial Times made it the "best idea put on the table among all the proposals put forward."

A wartime tool

It is, in short, the proposition that everyone is talking about. Spain calls for the creation of a gigantic stimulus fund with a budget of 1.5 trillion euros which would be financed by a mechanism unprecedented in the history of the European Union: perpetual debt.

"It is not very different from a traditional government bond issue, except that the date of repayment of the principal, that is to say the loaned capital, is not indicated. This leaves hear that there will be no end, "explains Jérôme Creel, economist at the French Observatory of Economic Conditions at Science-Po and associate professor at the ESP Business School, contacted by France 24. In short, the borrower agrees to pay annual interest ad vitam æternam and defers repayment of the original loan to Greek calendars.

Historically, this tool has mainly been used in times of conflict. Thus, the United Kingdom issued perpetual debt to finance its wars against Napoleon and also after the First World War. It was not until 2015 that London finally repaid the money raised in 1927 to help rebuild the country. For George Soros, the parallel is striking: Europe is again engaged in an expensive war, except that this time, the enemy is a virus. A similarity of situations that would justify using a weapon that has proven to be effective in exceptional situations.

But faced with Covid-19, it is not only a country that would use this mechanism. The idea would be "to let the European Commission issue debt on behalf of the EU," says Jérôme Creel. This is not normally his role, but Vítor Constâncio, former vice-president of the European Central Bank, has assured that the founding treaties of the EU would allow it.

Every borrower's dream

The sums thus collected would then be placed in the new European recovery fund and then distributed, in the form of grants, to the different Member States according to their needs and projects to put Europe back on the right economic track.

With the financial guarantee of the European bloc, such a debt issue should "benefit from the lowest possible interest rates", notes the French economist. The loan conditions would in any case be better than if the fundraising were carried out separately by the countries hardest hit by the pandemic, like Italy and Spain, which are also the most financially fragile.

"This is a real opportunity to seize," says Jérôme Creel. This proposal resembles, in effect, the scenario dreamed of by any borrower: being able to contract a very long-term loan at a very low interest rate. George Soros estimates that the EU should pay interest of around 0.5% each year, or "just over 5 billion euros a year if Europe raises 1,000 billion euros".

Politically, such an initiative could also be justified. Currently, the European Central Bank is stepping up major measures to respond to the crisis, and the United States is adopting unprecedented aid plans. The EU has fallen behind, and the use of such an unprecedented mechanism would demonstrate that Brussels has taken "the full measure of the challenges of the pandemic", assures Jérôme Creel.

This could also be a good deal for lenders. "These bonds would provide a regular return with an interest rate probably higher than most long-term investments and which, thanks to the guarantee of the European Commission, should be fairly easy to resell on the secondary market, if necessary ", analyzes the economist.

Traditional opposition from northern European countries

But that is in theory. In practice, finding enough investors willing to lend large sums without knowing if they will one day revise the color of their initial bet can be difficult, admits the British daily The Guardian. This type of financial instrument is only attractive to those who can afford to bet for the very long term, either the large American pension funds or certain banks. But a pension fund, for example, must be able to recover its stake, in order to be able to reimburse those who have entrusted their money to them for their retirement.

For Jérôme Creel, this obstacle is not the most insurmountable, however. Another challenge, of a political nature, can prove to be much more deadly for the Spanish proposal: the traditional opposition of the countries of Northern Europe to any idea of ​​pooling the European debt. They do not want to put their finger on a mechanism that could become permanent and would risk obliging the rich states to financially guarantee the expenses of their less fortunate European neighbors.

Indeed, Brussels will probably dip into the European budget to reimburse the interest. In other words, it is the countries which contribute the most to the European budget - including the countries of Northern Europe - which will repay the most while a significant part of the means of the stimulus fund will be used to help the most financially fragile states .

The eternal debt proposal therefore risks the same fate as the "eurobonds" during the debt crisis of the 2010s or the "corona bonds" at the start of the Covid-19 pandemic. However, for Jérôme Creel, this initiative would prove that Europe can demonstrate the three qualities necessary to overcome any crisis: "Ambition by proposing something innovative, coordination and solidarity".

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