Eurobonds, risk sharing and covid-19

Abstract

The common nature of the coronavirus crisis has intensified calls for deepening European fiscal risk sharing. Whether that risk sharing takes the form of outright real time transfers, explicit bailouts in the future, debt-monetization through the Eurosystem or jointly issued eurobonds, is of secondary importance relative to the question whether this risk sharing itself is justified. Insurance is supposed to protect against idiosyncratic risk, and to the extent that an exogenous covid-19 shock might hit European countries with asymmetric strength, moral hazard concerns about “past irresponsible behaviour” are not justified. However, member states might also differ in their preparedness to a symmetric exogenous shock. Whether to share risks stemming from such asymmetric “pre-existing conditions” is less the domain of insurance, and more of redistribution, and solidarity. Looking deeper into the underlying reasons for these asymmetries helps us see why the moralizing narrative about past irresponsibility is overly simplifying, and why solidarity towards the euro periphery is warranted from northern members.