In crisis times like these, sovereign debt is of pivotal importance as safe assets. Due to their countercyclical price movement, safe sovereign bonds serve as an anchor of macroeconomic stability. In an economic downturn or after an exogenous shock, a flight to safety increases the price of these bonds, simultaneously lowering their yield. The lower financing costs increase the fiscal space, while the higher price improves the banking system’s balance sheets. [...]
It is debatable whether the president of the European Central Bank, Christine Lagarde, acted wisely when she said that ‘we are not here to close spreads … there are other actors to actually deal with those issues’. Yet, despite the unfortunate timing, she raised a valid point: it was the responsibility of governments in 2010 to dispel fears of a Greek default and it is their responsibility to have each other’s back in today’s crisis. In the same vein, Lagarde called upon euro-area governments to act and issue eurobonds, a demand also formulated by groups of economists on March 20th and March 21st, as well as by nine of the 19 euro-area governments on March 26th. [...]
The governments simply agree, in this time of crisis, to ask the ECB to package their bonds into EUR-bonds as a signal and an instrument of solidarity, unity and determination. The ECB could even buy these bonds on the secondary market as part of its purchase programme. Ideally, however, EUR-bonds would be purchased by banks and other investors as safe assets, whereas the ECB would focus its purchasing programmes on eliminating any sovereign-yield differentials which may persist—despite the signals sent out by euro governments in issuing debt together.
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