The common monetary policy is an effective tool to deal with the COVID-19 pandemic, which affects all euro area countries simultaneously. However, its effectiveness differs across the MS due to variations in the severity of the crisis. National fiscal policy should take an active role in offsetting the economic effects of the crisis but is greatly limited by fiscal rules designed to control public deficits and debts and to maintain the integrity of the euro area in the long run. The risk of default of over-indebted national governments could be reduced by making monetary policy more aggressive, reforming some fiscal rules and creating common public debt.
Pessimistic expectations in the financial market could lead the economy of the Economic and Monetary Union (hereafter EMU) into a downward spiral that would seriously increase the risk of a eurozone breakup. The ECB has a great role to play in stabilizing the financial market. It has to take aggressive actions to avoid the worst-case scenario.
Theoretical foundation justifying an aggressive response by the ECB
The need for aggressive monetary policy to avoid the worst-case scenario is supported by a number of studies examining the implications of the robust control technique (Giannoni 2002; Leitemo and Söderström 2008; Dai and Spyromitros 2012; Qin et al. 2013). If private agents form expectations via adaptive learning when facing uncertainty, monetary policy should be even more aggressive to deal with the worst-case scenario (André and Dai 2018). The ECB can do this by implementing aggressive unconventional policy measures that bypass the liquidity trap to reduce the impacts of exceptionally large negative supply and demand shocks on the eurozone economy, thus avoiding self-fulfilling bad equilibrium feared by financial operators and policymakers. The ECB has been very reactive since March 2020 and remains in a position to do whatever is necessary to calm anxieties in the financial market. The initial measures include making available up to €3 trillion in liquidity through refinancing operations and lending to banks at the lowest interest rate the ECB has ever offered, − 0.75%. The ECB has also targeted the public sector with the €750 billion Pandemic Emergency Purchase Program (PEPP), aimed at stabilizing the EMU’s sovereign debt markets to avoid spikes in the spreads experienced by some MS compared to German bonds following the pandemic.Footnote 2 On 4 June 2020, the ECB decided to increase the envelope for the PEPP to €1,350 billion. To affect the whole term structure and hence offer broader financial conditions, under the PEPP, public sector securities with a residual maturity ranging from 70 days up to a maximum of 30 years and 364 days are eligible for purchase. These measures have been accompanied by an easing of regulatory ratios by European banking supervisors, freeing up an estimated €120 billion of extra bank capital.
Potential factors of aggravated macroeconomic risks
Several factors could aggravate the economic and financial risk following the COVID-19 pandemic and make the worst-case scenario even more difficult to deal with. The drastic reduction in economic activity increases business failures and households’ defaults, causing banks to undergo substantial losses which could lead to them to struggle in the coming months. The resulting financial instability could make the current economic recession more severe.
This risk is particularly important considering that economic expansion was already showing signs of weakness before the pandemic. The expansion was supported by accommodative macroeconomic policies that raised the rate of GDP growth above its long-term potential in most industrialized countries. Just before the COVID-19 crisis began, central banks had barely begun exiting from the quantitative easing policies applied since the global financial crisis of 2008. The room of maneuver for monetary policy has not been restored by significant interest rate hikes as in previous cycles. Many governments have been pursuing highly accommodative fiscal policies, leading to large budget deficits and rising public debts over the past decade. They have given up on creating fiscal space for a counter-cyclical fiscal policy aimed at supporting the economy in the event of a major crisis. In the EMU, a few exceptions, such as Germany and the Netherlands, have been characterized by budget surpluses in recent years according to Eurostat.
Economic growth has been boosted by excessive positive wealth and balance-sheet effects due to the exceptional rise in asset prices since March 2009, driven by extremely accommodative macroeconomic policies. The collapse of stock prices in March 2020 is likely to seriously reduce households’ demand and thus GDP growth. Lower asset prices also negatively impact the balance sheets of firms and banks, thereby tightening their financing constraints.
The fact that the previous expansion was excessively based on debt financing makes it very likely that some systemically important public and private borrowers will face major difficulties during the severe economic downturn. This could trigger a financial crisis that would in turn worsen the economic recession. In particular, the health crisis has heightened the budgetary difficulties of many national governments across the world and hence the risk of sovereign default. In the euro area, Italy, Spain and Portugal, among others, are most exposed to this type of risk, which could lead to highly contagious twin self-fulfilling sovereign debt and banking crises.
Finally, the high degree of global interdependence in the production process is also a major factor aggravating macroeconomic risks in the eurozone countries that are largely open to foreign trade. More than any other past pandemic, the COVID-19 crisis has caused major disruptions in production and supply chains worldwide. Barriers erected to slow the spread of this pandemic have reduced the interconnectedness between and within countries, thus preventing the global economy and hence the euro area from operating smoothly.
Limitations to the effectiveness of monetary policy
Central banks primarily aim to stabilize inflation and output. Since the global financial crisis of 2008, they have implicitly or explicitly taken greater responsibility for financial stability. This has led them to play a key role in macro-prudential supervision, to actively communicate with market operators, and even to implement measures designed to support asset prices when they are plummeting.
Prior to the current health crisis, interest rates set by central banks in developed countries were close to historically low levels. This policy has shown its limitations as a stimulus to economic growth. It redistributes wealth between borrowers and savers. Its effectiveness relies on increased spending by borrowers but can be reduced by a change in the behavior of savers. The latter, instead of reducing their savings in response to falling interest rates, could increase their savings effort to reach an initially set target, thus partially canceling out the stimulating effect. In addition, the COVID-19 pandemic could encourage households to save more and firms to reduce their debt in the future, in particular those who have been experiencing serious financial difficulties during this crisis.
Despite the limited room of maneuver for interest rate policy, central banks can still play an important role by implementing unconventional policy measures. In a context where massive budget deficits must be financed, such measures help, inter alia, reduce tensions in public and private debt markets. This avoids a sharp across-the-board rise in interest rates and makes it easier for governments and private firms to raise funds, thereby reducing the risk of banking and sovereign debt crises. This type of risk is particularly high in the euro area given its institutional constraints.
Monetary policy would be quite effective in mitigating the negative economic effects of the pandemic by preventing the vicious circles of economic and financial crises from occurring. However, it cannot compensate for the decline in GDP, which is real and very significant. An increase in the quantity of money via bank loans helps avoid the loss of revenues when households and firms are facing significant financing and liquidity constraints or when self-fulfilling pessimistic expectations are leading the economy towards a bad equilibrium with abnormally low economic activity.
To deal with the current financial difficulties of many firms, simply injecting liquidity into the financial system is not enough. Monetary policy actions should be taken to minimize the risk of this temporary health shock having a major adverse impact on the economy over the medium term by causing massive business failures and significant damage to the balance sheets of surviving firms. It is imperative to provide incentives for banks to grant additional loans and/or defer the repayment of existing loans in order to support firms that were financially healthy before the crisis. This helps preserve the production and distribution chains of goods and services so that firms can resume normal operations once the lockdown ends. However, this pandemic, through its major and complex economic and financial effects, increases information asymmetries between banks and borrowers. This leads banks to become more prudent in their lending activities, given regulatory constraints and risk management principles.
Institutional and economic constraints for the conduct of monetary policy in the EMU
According to its Statute, the ECB’s primary objective is price stability in the EMU. It can support growth if average inflation in the eurozone is kept under control. Financial instability is now also a concern for the ECB.
The ECB is subject to specific economic and institutional constraints. The construction of the EMU has reduced the resilience of MS to adverse macroeconomic and financial shocks. The absence of banking and fiscal unions requires MS to use their own means to offset the effects of adverse shocks on national economies. Insufficient mobility of production factors and lack of flexibility in national labor markets hinder the adjustment of an economy suffering from asymmetric shocks. The Stability and Growth Pact (SGP 1997) was designed, by limiting budget deficits, to avoid moral hazards in the management of national fiscal policies which, if left unchecked, could oblige the ECB to monetize some MS public debt. The no-bailout clause in the Maastricht Treaty increases the risk of bankruptcy for a highly indebted MS. Meanwhile, the role of national fiscal policy is reinforced in the absence of monetary sovereignty. Moreover, MS are in charge of regulating and supervising national banking systems and resolving national banking crises. They are expected to fully bear the costs of a national banking crisis. They might be unable to face the undesirable budgetary consequences of a serious crisis.
The ECB conducts policy for all eurozone countries independently of any European authority or national government. The heterogeneity of the eurozone economies is detrimental to the effectiveness of the common monetary policy, which may benefit little to some MS. The ECB could find it difficult to respond to the COVID-19 pandemic, which is admittedly a symmetrical shock, but one that has heterogeneous consequences. Furthermore, the single monetary policy cannot be properly coordinated with national fiscal policies. MS are further constrained by the no-bailout clause, which stipulates that they must not financially rescue others, while the ECB refrains from monetizing their debts.
There is an incompatibility, evidenced by the eurozone crisis of 2010–12, between the independence of the ECB, fiscal sovereignty and the no-bailout clause. The no-bailout clause removes moral hazards and prevents a MS from excessively increasing its sovereign debt, thus avoiding the erosion of the EMU’s foundations while allowing sovereignty over fiscal policy to be left to MS. However, fiscal policy tends to hold monetary policy hostage if national budget deficits are high and the SGP is ineffective in limiting national public deficits and debts. There is a conflict between high and disparate levels of public debt in MS and a single monetary policy with a relatively low inflation target that limits the possibility of reducing the real value of public debt. Moreover, as fiscal authorities are responsible for rescuing national banks under their supervision, there is a “diabolical loop” between the financial difficulties of a MS and the national banking crisis (Brunnermeier et al. 2016).
As the sovereign debt crisis of 2010–12 in the EMU has shown, the ECB could not refuse to play the role of last-resort lender to rescue over-indebted MS at the risk of breaking up the EMU. This leads the ECB to lose some independence. Although both the SGP and the “no bail out” clause are aimed at making the EMU stable, keeping the latter while failing to comply with the SGP increases the risk of breaking up the EMU. The varying risks on sovereign debt across the euro area would result in different interest rates despite the single monetary policy. The effectiveness of monetary policy is low in countries whose governments face a risk of insolvency. Threatening to exit the EMU, these countries can put great pressures on the EMU for waiving the no-bailout clause and reducing the ECB’s independence, implying a risk for the ECB to lose credibility and face a lower effectiveness of its policies in the future.
Various reforms since 2008, e.g., the creation of the European Stability Mechanism (hereafter ESM) and of the European Banking Union and the introduction of the Euro Plus Pact, have allowed the EMU to be more resilient in the event of a crisis. However, if national fiscal sovereignty is not sufficiently constrained, these reforms will not eliminate the risk of a eurozone crisis. Institutional constraints still limit the scale and scope of the ECB’s responses to the pandemic. To cope with that, the ECB temporarily puts aside the allocation keys when engaging in massive purchases of national bonds.Footnote 3 Its audacity should be accompanied by fiscal policies that ease the financial constraints of private agents.
Risk sharing, helicopter drop of money and monetization of public debt
It is tempting for policy makers to push the ECB to implement a “helicopter drop of money” or finance additional public spending through money creation in response to the COVID-19 pandemic. These policy measures are feasible to some extent according to the capacity of a central bank to create seigniorage revenue thanks to money creation, although their effectiveness in stimulating growth is limited (Dai 2011). However, they are at a great risk of being misused for political reasons. Economists agree that a credible central bank has some power to create seigniorage revenue without causing inflation to shoot up. However, the amount of seigniorage revenue that can be raised is not very high in many countries.Footnote 4 Excessive recourse to money creation is a source of high inflation, likely to make inflation difficult to control in the future. A central bank may lose this power by repeatedly abusing it.
The ECB does not have a mandate to intervene in wealth redistribution between MS. A helicopter money drop or the monetization of public debt could involve such redistribution. The inflationary effects of these policies could adversely affect the wealth of people in the MS that receive less newly created money than is proportionate to their economic weight. This could lead these MS to oppose such policies.
A helicopter drop of money has actually been implemented in the EMU by national governments that have provided large-scale financial support and guarantees to struggling firms and compensated for a large part of the lost income of workers who are under lockdown or in temporary partial unemployment schemes.
The extraordinary public spending by national governments in the euro area raises fears that the ECB could resort to a large-scale monetization. The ECB is doing quite a good job and the fears of monetization are not well founded. After all, the ECB does not need to implement such a monetization because the current stimulus measures are equivalent to a helicopter drop of money or a monetization of national governments’ budget deficits, as long as the ECB does not exit these measures. Such measures have the advantage of being reversible and hence are not inflationary when economic conditions are substantially improved.
Sense and nonsense of fiscal rules in the eurozone
At the national level, fiscal policy is still the main economic policy tool that the MS use to deal with the short-run negative effects of the COVID-19 pandemic. However, national governments are constrained by a number of fiscal rules that could reduce the effectiveness of fiscal policies. Some reforms are needed to remedy the weaknesses of existing fiscal policy rules that have been revealed by the current crisis. A “smart” fiscal rule is needed to deal with the COVID-19 pandemic.
A brief overview of fiscal rules in the Euro Area
The origins of fiscal discipline in the euro area date back to the Maastricht Treaty (1992). One of the main aims of the Maastricht Treaty was to launch the EMU project. The Treaty established the steps to take and the conditions to be met for a country to be eligible for the single currency. Among these conditions, called “convergence criteria”, two criteria relate to public finance stability in the candidate country. Indeed, unsustainable national public finance could jeopardize the stability of the newly created monetary union. It was therefore necessary to monitor national public finance trends and ensure its sound management over the long term. Two rules were retained: the national public debt of the candidate country must not exceed 60% of GDP (this was the average public debt-to-GDP ratio in the EU-15 as of the late 90 s), and the national public deficit must not exceed 3% of GDP (a threshold set in reference to the debt dynamic equation which gives the level of public deficit allowing public debt to be stabilized around 60% for a real activity growth rate at 3% and an inflation rate at 2%).
If the candidate country meets all these convergence criteria, it is then allowed to join the eurozone. Any country belonging to the EMU is then subject to a fiscal rule introduced by the SGP, which entered into force on January 1, 1999, with the birth of the eurozone. This fiscal rule can be described as the supranational fiscal rule, in contrast to the national fiscal rules also in force in most Eurozone member countries. The Pact has two complementary objectives: the “stability” of public finance, requiring Eurozone countries to pursue sound management of public finance, and the “economic growth” in the EMU, ensuring that national governments have enough leeway to intervene if necessary (particularly if a cyclical shock occurs).
To achieve these two complementary objectives, the Pact has two types of instruments: the “dissuasive” arm (a public deficit ceiling with sanctions imposed in case of non-compliance, and exceptions to the rule only in very specific economic circumstances) and the “preventive” arm (multilateral surveillance procedure with “stability programs”, multi-annual programs setting fiscal guidelines over three years for the purpose of achieving budget balance in the medium term).
Despite this fiscal rule, the eurozone has experienced several periods of turbulence (with a first crisis in 2004, the Great Recession from 2007 to 2009, and the COVID-19 crisis since late 2019) which have doubled as crises for fiscal discipline in the eurozone. On each occasion, the fiscal rule was reformed, under the assumption that the problem lay in the rule. These successive reforms have resulted in requirements of compliance with an ever-growing stack of indicators, but there has been no in-depth consideration of the real reasons for the failures of fiscal discipline in the euro area. Fiscal rule reforms have failed to ensure a real coercive disciplinary power over the MS and to provide effective monitoring of the efficient management of national public finance.
Lessons from past crises revealing fiscal discipline weaknesses
To better understand the strengths and weaknesses of fiscal discipline in the euro area, it is worth looking at the seminal paper by Kopits and Symansky (1998) on the characteristics of an ideal fiscal rule. They identify eight properties of a “good” fiscal rule:
Suitability for the intended objective: the rule must make it possible to control the discretionary orientation of fiscal policy;
Clear definition: the indicator, the sanctions and the exceptions to the rule must be clearly explained;
General consistency: the rule must be consistent with the objectives of economic policy;
Robust analytical foundations: the target and the reference value chosen must meet a precise economic justification;
Transparency: the rule must be understandable by public opinion;
Simplicity: the calculation of the target must be able to be done without requiring sophisticated calculation techniques;
Flexibility: governments must be able to continue to carry out their missions;
Credibility: control procedures and sanctions must be applied in an impartial and consistent manner.
Even if Kopits and Symansky (1998) do not explicitly use the term of “fiscal rule effectiveness”, their contribution has nevertheless been the cornerstone of the “good” fiscal rule debate. Barbier-Gauchard et al. (2021) have additionally discussed the link between fiscal rule and government efficiency to foster a useful debate on fiscal rule performance.
Based on the conditions above, the current fiscal rule in the EMU suffers from three major weaknesses. First, the current rule now considers too many (and sometimes redundant) indicators simultaneously (total public balance, structural balance, public debt, growth of public expenditure, multi annual public finance program) to be able to make a clear and unequivocal diagnosis on the current state of public finance management in the country.
Secondly, the current fiscal rule indicators do not consider the fiscal functions identified by Musgrave (1959). More specifically, national public finance must be used for the allocation (production and supply of public goods and services), the redistribution of income (for social justice purposes) and the economic stabilization of activity when an economic shock occurs. In this context, in addition to measures which could be taken at the Community level for the EU as a whole, the fiscal rule must also allow countries to provide quality public services and ensure economic stabilization. The current rule already leaves sufficient room for maneuver to countries in the event of a cyclical shock. Nevertheless, in order to meet the Maastricht convergence criteria, some countries have had to implement drastic reduction measures in some areas of public spending, sometimes to the detriment of the quality of public services (education, health, security, etc.) and long-term public expenditure growth. The COVID-19 crisis highlights the extent of the heterogeneity of national health systems—some of which have been hit very hard.
Finally, the current rule suffers from insufficiently credible sanctions for several reasons. First, imposing a financial penalty on a country that is already struggling financially is nonsense. In addition, the procedure for imposing the sanction is too complex and not automatic, so that all countries are quite aware that they will never be sanctioned. Moreover, the most efficient fiscal rule is the one the country has imposed on itself. In the eurozone, national fiscal rules seem more effective than the supranational fiscal rule as underlined by Barbier-Gauchard et al. (2019). In other words, the current fiscal rule fails to meet at least three of the eight criteria proposed by Kopits and Symansky (1998): clear definition, general consistency and credibility.
For a “smart” fiscal rule in the eurozone
The COVID-19 crisis represents both an opportunity and a threat to the economic governance of the eurozone: an opportunity if public decision-makers rise up to the occasion and commit to adopting a smart supranational fiscal rule that is consistent with economic reality, and a threat if no lessons are learned from this new painful experience for monitoring national public finance.
Overall, the future “smart” fiscal rule for the eurozone must be designed considering the requirements of MS (supply of public goods and services, equity, economic stabilization, support for long-term growth) as well as the opportunities offered by European integration (such as the joint financing of major long-term investment programs, the pooling of some public expenditure at the community level, etc.).
This is only feasible when heavily indebted countries have reduced the level of their public debt. Several non-mutually exclusive options for action are possible to remedy the weaknesses of the current fiscal rule in the EMU:
to monitor only the structural public balance excluding public investment to free up financial leeway at the national level, thus ensuring economic stabilization and support for long-term growth;
to centralize part of the national public expenditure for certain public goods and services in order to free up financial leeway at national level for the supply of public goods and services which must remain provided at the national level;
to consider the “quality” of fundamental public goods and services as vital to the well-being of citizens (education, health, security) in the assessment of the management of national public finance;
to support national public investment programs with European co-funding obtained thanks to the strike force of an organization for financing investment projects such as the European Investment Bank (hereafter EIB);
to replace the financial fine to be paid in the event of non-compliance with a sanction designed to cut all or part of the Community funding for a country that has failed to comply with the fiscal rule, introducing an automatic sanctioning mechanism (requiring no political decision to be taken).
In a nutshell, the future “smart” fiscal rule for the eurozone could be a rule that only relates to the structural balance excluding public investment (with a cut of all or part of the Community funding) accompanied by an ambitious Community-level program to support public investment and monitor the quality of fundamental public goods and services for citizens. In addition, at the euro area level, a euro-zone budget considered as a European automatic fiscal stabilization mechanism could be a valuable complement to automatic fiscal stabilizers at the national level to cushion the effects of cyclical shocks on economic activity.
Nevertheless, much remains to be done on this topic from an academic point of view because it means decision makers should be able:
to accurately measure net public investment and its long-term impact on growth and employment;
to assess the “quality” of fundamental public goods and services and define minimum “quality” standards to be guaranteed;
to identify public goods and services for which European added value is indisputable and which therefore deserve to be considered as European public goods and services and financed at the Community level;
to take a courageous decision to sanction a country that does not respect the rule.
Challenges and prospects for a common European public debt
Despite the ECB’s aggressive monetary response, some MS have been more affected by COVID-19, which has prevented them from implementing effective fiscal policies. It has become urgent to pool some public debts with the aim of improving the public finances of highly indebted MS or financing a European automatic fiscal stabilization mechanism.
The need for a new common debt instrument
The pandemic crisis requires governments’ interventions to provide financial support to mitigate the negative impact on health systems and stimulate the economy. National governments must intervene on a massive scale. When the crisis is behind us, the public debt will have risen steeply.
European countries experiencing the largest increase in public debt, namely Italy, Spain, and France, are three of the four largest eurozone economies. To make matters worse, all of this must be done at a time of declining tax revenues as long as activity remains repressed. Such evolutions will question debt sustainability in these countries, leading to the risk of a new sovereign debt crisis as in 2010–12.
Under certain circumstances, with the existing institutional mechanisms, additional instruments could be introduced. Thus, regardless of how governments tackle this mountain of debt (i.e. partial debt cancelation or “hair-cut”, the ECB’s Outright Monetary Transactions (hereafter OMT) program, assistance from the ESM, issuance of a common debt instrument: corona bonds), it is likely to weigh on public policies for a long time. In any case, the fiscal potential of Eurobonds is more powerful than the hitherto untapped combination of assistance from the ESM and of the ECB’s OMT program.
It is crucial to find the optimal forms of joint action quickly and without modifying the European Treaties. A low-cost and long-term funding instrument is needed to avert a new debt crisis. This will require more European solidarity, either by issuing corona bonds, or by having the ESM provide unconditional aid along with the ECB’s sovereign bond buying program or OMT.
Corona bonds: the proponents
The mutual debt option or the principle of pooling national public debts (Eurobonds, or corona bonds) is a common debt instrument to jointly issue public debt across all MS (Blanchard et al. 2017). There is an ongoing heated debate between proponents and opponents of this ambitious possible budget option (Herzog 2020).
One advantage of this type of mutual debt would be the possibility of raising long-term funds at a low cost for the weak countries in the eurozone. The interest rate on common liability bonds would be low, possibly negative, as financial markets would not question the solvency of the eurozone as a whole.
For Dullien et al. (2010), the common liability bonds would offer a safe asset to eurozone banks, which are overexposed to their home countries’ sovereign debt. As corona bonds would be at least as safe as German sovereign bonds and have a significant volume, they would provide a safe European asset to the financial markets and could be used by the ECB for liquidity operations.
Moreover, Northern countries would avoid the risk of “financial contagion”. The mutual debt option offers a joint line of defense against common risks for everyone—not only vulnerable Southern countries. It also offers the opportunity for the eurozone to improve its resilience in the future.
Recently, six prominent German economists (Bofinger et al. 2020) have proposed issuing a €1,000 billion mutual bond (8 percent of the EMU’s GDP) to jointly raise funds to finance economic support packages during the pandemic.
Corona bonds: the opponents
Despite the growing support for corona bonds among economists across the political spectrum, there are some opponents to the introduction of common debt instruments.
A large body of academic literature suggests the existence of “moral hazard risks” in the eurozone.Footnote 5 A huge collapse is expected as some MS have become more indebted and sought to externalize the cost of public debts. This literature recommends precautions, involving either the adoption of strict fiscal rules, or a complete transfer of sovereignty, i.e. a political union (Beetsma and Bovenberg 2000, 2003). Without a political union in place, the instrument of joint public borrowing via Eurobonds would be fully endorsed.
A second argument against the use of a common debt instrument is that the eurozone is not a state.Footnote 6 There is no European fiscal sovereignty and hence no right to issue public debt (Herzog 2020).
Finally, centralized instruments will not solve the structural differences between Eurozone MS, as sovereignty and citizens’ preferences regarding public deficits remain informed by national rationales and corona bonds may be difficult to implement in the eurozone due to both national and European legal constraints.
Revived tensions between MS?
Some voices have sounded the alarm about the European project being in “mortal danger” should the member countries prove incapable of showing their solidarity. Disagreements in the Eurozone have mostly revived the fears of the 2010–12 sovereign debt crisis. At the time, there had already been talk of Eurobonds. Ten years later, the idea of corona bonds, as opposed to that of the ESM, has generated the same violence and the same hostility on both sides.
Peter Bofinger, a German economist, called for so-called corona bonds that would be fundamentally different from the Eurobonds discussed in the euro crisis in 2010. “At the time, it could be argued that Italy’s problems were its own fault, and helping them by using Eurobonds might send the wrong message. However, as far as the coronavirus crisis is concerned, no one is responsible, and clearly the corona bands will not give Italy an incentive to make another epidemic happen”. In addition, unlike Eurobonds, the MS could determine in advance exactly where the money would be allocated. Macroeconomic policies can therefore partially respond to the new challenges introduced by the pandemic crisis.