The EU is thinking about Eurobonds for defense, despite the flops of the past

Eurobonds to finance European military spending? It is one of the hypotheses on the table in Brussels where the Twenty-Seven met to discuss common defense and military aid to Ukraine. And in order not to burden the coffers of individual states too much, we have returned to talking about the Eurobond hypothesis, as happened during the pandemic to finance the economic recovery of the member countries. The favorable front is led by France, with Italy, Estonia and Poland alongside. The frugals are contracted, led by Germany, the Netherlands and Denmark. Finland is among the “possibilists” for a further common European debt.

Eurobonds are bonds issued by European Union countries. As with individual state bonds, investors can buy the bonds and then “lend” money to the country that issues them and receive interest in return. But in the case of Eurobonds the loan is collective, to all the countries of the European Union which together issue the bond.

A first “experiment” of what we now call eurobonds can be considered the one done in the 1970s. During the first energy crisis, a community loan mechanism was established which, through the issuance of debt securities guaranteed by the member states of the European Communities, had the aim of helping countries in difficulty due to the oil crisis. There was not yet the European Union of today and there were no Eurobonds, but it was the beginning.

The first real attempt was instead with the financial crisis around 2011. The spreads began to widen, the crisis that started in Greece also reached Portugal, Ireland, Italy and Spain. José Manuel Barroso, then head of the European Commission, proposed the first real introduction of Eurobonds. There was a central bank and a single currency and it was thought it was time to also create a single public debt, guaranteed by the eurozone. But the initiative was scuppered (primarily by Germany) in favor of a different strategy.

The Eurobond hypothesis has forcefully returned to the table during the pandemic. There was talk of Coronabond, a common debt instrument issued by a European institution to raise funds on the market for the benefit of all Member States. Also in this case the Union was divided between those in favor and those against. In the end, we opted for the Recovery Fund and therefore the Recovery Bonds. To finance the recovery after the health, economic and social crisis, a recovery fund with European common bonds was created. The difference compared to the Eurobonds is that the Recovery bonds do not provide for a mutualisation of the past debt. Therefore also in this case there was no mutualisation of the debt.

And we get to today. On the table in Brussels we are once again talking about Eurobonds, to finance common defence. But there are still two fronts and the European elections in June are involved.