top of page

The Eurozone COVID-19 Crisis: EU Policy Options

Ethan Ilzetzki[1]

Friday, 1 May, 2020



The COVID-19 virus has already claimed over 100,000 lives in Europe and nearly 200,000 worldwide. The economic consequences have also been dire. EU member states have taken a variety of measures to contain the spread of the virus, support their health care systems, and cope with the economic fallout. In addition, the EU has already committed 5% of Eurozone GDP to support member states. A large majority of panellists would like to see greater support coming from the EU to its members. The panel was split on financing methods, with equal numbers supporting an enlarged EU budget and joint-liability borrowing at the EU level (e.g. Coronabonds).


The April 2020 CfM survey surveyed its panel of top European economists on the financial support that the EU should provide to member states to support their efforts to contain the COVID-19 pandemic and its economic fallout. Panellists were first asked for the amount of support that should come to member states beyond their own budgetary resources. They were then asked about their preferred method of financing. 

The EU Response to COVID-19

The COVID-19 virus has already claimed tens of thousands of lives in Europe. The countries of southern Europe were the first and hardest to be hit, with Italy and Spain both reporting more than 20,000 COVID-related deaths to date. The economic fallout has also been large. The IMF estimates that Eurozone GDP will decline by 7.5% in 2020. The Eurozone’s southern members entered the crisis with high public debts (Spain at nearly 100%, Italy and Portugal well over 100%, and Greece nearing 200% of GDP). GDP levels in Italy and Greece were still below those in 2008 when the pandemic hit. 

Individual EU member states have responded rapidly to the economic crisis. European leaders have also been planning measures at the EU level to mitigate the economic damage and to support the weaker and more highly indebted southern members. Eurogroup finance ministers have agreed to mobilize the European Stability Mechanism (ESM) to support member states. The ESM was set up as a €500 billion fund to lend to member states facing a crisis at concessional rates, conditional on structural reforms. It appears that conditionality may be relaxed for coronavirus-related funding and at the time of writing it is still unclear whether ESM funding can be used to support economic measures beyond health care costs.

The EU has also announced SURE, a €100 billion unemployment scheme. The European Investment Bank will leverage €200 billion in financing for SMEs. (See summaries of the various facilities by Deutsche Welle and Bénassy-Quéré et al, 2020.) This past week, EU member state leaders asked the European Commission to design a recovery fund and to include further measures in the EU’s upcoming multiannual financial framework, so that it is likely that further commitments will follow.  

In the first question, panellists were asked to opine on the total size of the package they would want to see coming from EU institutions in support of their member states in 2020. The question referred only to EU budgetary support measures as opposed to actions taken by the ECB.


Question 1: What is the total size of funding that you would advocate at the EU level in support of its members to weather the COVID-19 crisis this year?















Sixty-two panellists responded to this question, of whom 74% supported more funding than the €700 billion (roughly 5% of Eurozone GDP) currently being provided. Half of respondents suggested that the EU would have to provide assistance of 5-10% of GDP, although those proposing even larger assistance expressed greater confidence in their responses. A main theme in the call for greater EU assistance was the limited fiscal capacity of countries in southern Europe to respond to the crisis independently. Further, the unexpected nature of the shock means that “there are few or any direct moral hazard issues involved”, in the words of John Hassler of the University of Stockholm’s Institute for International Economic Studies (IIES). Wendy Carlin of University College London argues that withholding assistance would lead to long-term “scarring effects” on the worst-hit Eurozone economies.


A number of respondents viewed the crisis as an opportunity to mend structural deficiencies or improve the Union’s design. Martin Ellison (Oxford) describes the current crisis as “an opportunity for the EU to step up to the plate and realise its ambitions to be the primary coordinator of the European trading block.” Evi Pappa (European University Institute) goes further, arguing that the “EMU's original scope was to be a Union of transfers” and that “the EU should do everything it takes to weather the COVID-19 crisis in those countries that were… randomly and more severely affected by the pandemic.” Roger Farmer (Warwick) contends that without “a mechanism to allow for permanent fiscal transfers from rich to poor regions… the alternative is the breakup of the EMU.”


The 10% of respondents that view the current level of funding as either sufficient or excessive noted that the worst-hit countries entered the crisis with weak public finances.

Harris Dellas (University of Bern) argues that if Italy had entered the crisis with Germany’s levels of debt, it would not have required assistance. Jorge Braga de Macedo, of the Nova School of Business and Economics (Lisbon), argues that excessive transfers from north to south would lead to “higher geopolitical tensions which the pandemic has exacerbated so far.”  Robert Kollman of Université Libre Bruxelles notes that the shock itself was symmetric. He sees “a strong case for cross-country risk sharing via the EU institutions” in the case of asymmetric shocks, but that “this logic does not apply” in current circumstances.


A number of respondents rejected the idea of putting a specific price tag on EU assistance. Francesco Giavazzi (Bocconi) cites the “large uncertainty about how this pandemic will develop” as a reason not “to pre-commit to a number”. Instead, “the ‘whatever it takes’ attitude is far superior.” Further, some respondents noted that the size of assistance would depend on its nature. Agnès Bénassy-Quéré states that the “exact number” would depend on “the distribution of loans and grants, and on the maturity of the former.”


Financing mechanisms

On top of the debate on the measures required to support member states, the debate on financing these measures is if anything even more heated. With a limit of approximately 1% of EU GDP, the EU’s budget cannot contribute much to the fiscal costs of the support efforts. A number of alternative financing mechanisms have been put forth to finance national and EU-wide health and economic measures. The proposals differ in their mechanisms, but also in the extent to which they involve transfers (implicit or explicit) across member states.

The ECB has already provided financing through its Pandemic Emergency Purchase Programme (PEPP), in which the ECB has freed itself to buy debts of crisis countries disproportionately. Contrary to Outright Monetary Transactions, losses would not be shared among national central banks. Perotti (2020) has suggested expanding PEPP further to avert future sovereign debt crises, perhaps combined with some commitment to cooperative behaviour by beneficiary states (also see Blanchard 2020 on the need for further ECB support). Others have suggested the ECB could provide more direct or implicit financing (see Gali, 2020).

Additional proposals take the form of debt restructuring to provide additional fiscal space to highly indebted member states (see Vihriälä, 2020). Additional proposals have been put forth to provide direct transfers to weaker countries.

A number of economists have proposed issuing Coronabonds: long-term bonds to be issued at the EU level to support the fiscal costs of combatting COVID-19 and its economic consequences. Member states would be jointly responsible for repaying this debt. Some proponents of this idea insist that this would be distinct from earlier proposals for more permanent mutual borrowing arrangements such as ESBies (see Brunemeier et al, 2016). Bonds linked to GDP growth have also been proposed.

Finally, some proposals call for temporary or longer-term expansions of the EU’s fiscal powers to form a fund or to allow for direct transfers between member states. For example, the Spanish government has proposed a €1.5 trillion European Recovery Fund that would be raised in similar ways to the EU’s budget. These proposals may also be combined with further borrowing, but this repayment would be the mutual responsibility of member states through the expanded EU budget.

In the second question, panel members were asked for the best way to finance the costs of economic support from nation states and at the EU level.

Question 2: What is the best mechanism to pay for economic support provided by and to EU member states to combat the COVID-19 crisis?















Three-quarters of all respondents favoured either joint borrowing by member states in the form of ‘Coronabonds’ or an expanded EU budget, with respondents evenly split between the two. Supporters of Coronabonds expressed higher confidence in their responses. Some supporters of Coronabonds viewed this as a ‘black-swan’ event requiring special one-off financing mechanisms. Thorsten Beck (Cass Business School) writes: “This is a once-in-a-generation or even once-per-century crisis, which demands special funding, which should therefore be outside the regular budget.” Francesca Monti of King’s College London cites COVID Perpetual Eurobonds, suggested by Giavazzi and Tabellini (2020), as “the most effective tool to finance the fiscal measures that should be put in place.” There was, however, an appreciation of the larger challenges such joint borrowing would present. Franck Portier (UCL) contends that the relatively low risk premium on these bonds would be “an implicit transfer from, say, Germany to, say, Italy.” He writes: “I am ready to eventually finance it as a tax payer, but I am doubtful that public opinion in Germany or the Netherlands would agree.” Others viewed Coronabonds as a more permanent solution and the crisis as an opportunity to deepen EU fiscal unity. Nezih Guner (CEMFI) concludes that the crisis is “a critical time to think about the future of the EU as a fiscal union,” with “the very survival of the EU” at stake.


Supporters of an expanded EU budget viewed this as the safer option for an array of reasons. Panicos Demetriades (Leicester) noted that nationally-issued perpetual bonds, such as those proposed by the Spanish government, were “less problematic politically than Coronabonds or direct transfers.” Francesco Giavazzi (Bocconi) saw advantage in keeping the financing within the EU perimeter and to avoid “replicating the ESM model when a new institution was created outside the EU.” Roel Beetsma (Universiteit van Amsterdam) notes that the EU budget “already [has] the infrastructure in place (via the BICC, which also has some conditionality built in).”  Here too, a number of respondents viewed this as an opportunity to improve the EU fiscal framework in the long run. Panicos Demetriades suggests that an expanded budget would allow the EU to provide international public goods beyond the crisis, such as transport infrastructure and green technologies. Fabrizio Coricelli (Paris School of Economics) suggests borrowing at the EU level in addition to an expanded EU budget, as a means of “also fixing the original sin of the euro.”


A fifth of respondents were split between other financing options. Evi Pappa calls for debt restructuring because joint borrowing and EU budget expansion are “not politically feasible”, but debt restructuring is necessary when “the countries more severely hit by the COVID-19  at this moment need fiscal space.”  Maria Demertzis, in support of monetary finance, argues that “increasing the common budget is difficult in the short term,” whereas monetary finance is “temporary, real-time and effective.” Sweder van Wijnbergen (Universiteit van Amsterdam) calls for expanding the ESM, thus “negating the need for further institutional or legislative initiative.”  Several members of the panel opined that member states should shoulder the burden themselves. Harris Dellas (Bern), for example, sees a “moral hazard problem involved in the calls for solidarity,” when “some countries have shown little concern for maintaining fiscal space.” Finally several panellists clarified that they would ideally want to use a portfolio of several of the financing options.



Brunnermeier, Markus K., et al. “ESBies: Safety in the Tranches,” ESRB Working Paper Series, no. 21, Sept. 2016, doi:10.2849/5698.

Bénassy-Quéré, Agnès, et al. “COVID-19 Economic Crisis: Europe Needs More Than One Instrument,” VOX, CEPR Policy Portal, Centre for Economic Policy Research, 5 Apr. 2020.

Blanchard, Olivier. “Italy, the ECB, and the need to avoid another euro crisis.” Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, in Baldwin, R. and B. Weder di Mauro, Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, eBook, London: CEPR Press.

Galí, Jordi. “Helicopter money: The time is now.” Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, in Baldwin, R. and B. Weder di Mauro, Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, eBook, London: CEPR Press.

Giavazzi, Francesco, and Guido Tabellini. "Covid Perpetual Eurobonds: Jointly guaranteed and supported by the ECB." VOX, CEPR Policy Portal, 24 Mar. 2020,

Gros, Daniel. “EU Solidarity in Exceptional Times: Corona Transfers Instead of Coronabonds,” VOX, CEPR Policy Portal, Centre for Economic Policy Research, 5 Apr. 2020.

Perotti, Roberto. “The European response to the Covid-19 crisis: A pragmatic proposal to break the impasse,” VOX, CEPR Policy Portal, Centre for Economic Policy Research, 20 Apr. 2020.

Vihriälä, Vesa. “Make Room for Fiscal Action Through Debt Conversion,” VOX, CEPR Policy Portal, Centre for Economic Policy Research, 15 Apr. 2020.



[1] The author acknowledges Dhruv Narayanan for his able editorial assistance.

bottom of page