Judy Asks: Should Europe have common debt?

The term “eurobonds” is a distraction. It brings out all the old, eurocrisis-trained reflexes. Nor do eurobonds solve the problem at hand: Italy and Spain do not need common debt as such, they need transfers to master the crisis.

Ideally, a common European response would work via the EU. Based on guarantees by member states, the EU takes on long-term debt to fund a support and recovery program. This program would distribute more money to those regions that are hit hardest. And the debt service and later repayment would be tied to GDP, that is, to how well economies recover. Regions that are hit hard and recover slowly would receive transfers from regions that were not hit as severely and recover quickly.

The common European debt issuance is just the financial plumbing to make that work, but it is not open-ended mutualization of existing debt. The best framing would be an insurance: countries pay a regular, GDP-linked premium to receive payouts during severe crises.

There has never been a better time to implement such a European pandemic insurance. History will judge all European countries harshly if they fail to agree one.

Christian Odendahl is chief economist at the Centre for European Reform.

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