Guest comment: The EU transfer union - the good, the bad and the ugly

The coronavirus has hit the economies of the European Union (EU) hard. Measures to prevent the virus from spreading are in full swing. The economic consequences of this crisis will be felt for a long time to come.

Not all countries will be able to pay the 'corona bill' alone, such as economically 'weak' countries - at least that is how they are portrayed in some media. These countries seem to have less accumulated capital reserves than other member states do. The latter countries are more likely to recover from the economic malaise caused by the corona crisis and better support their economies, so it is reported.

Numerous programs have now been launched by the EU to deal with this crisis. In 2020, the ECB introduced an emergency package of measures, including the Pandemic Emergency Purchase Program (PEPP).

As part of this program, the ECB is buying up government bonds. This gives banks more scope to provide loans to businesses and households. However, the interest on government bonds remains low.

The PEPP also makes it easier - by relaxing regulations - for banks to borrow from the ECB. The EU also reached an agreement at the end of 2020 on a support package of 750bn euros to absorb the economic blows from the corona virus within the EU.

This seems also the foundation of the politically controversial Eurobonds, this time in the form of corona bonds. Eurobonds or corona bonds are bonds issued for the joint account of the member states. Governments and companies, including pension funds, lend money. The riskier the loan, the more interest must be paid. Financially ‘weaker’ countries pay lower interest rates than countries that are better off economically.

Criticism of the Eurobonds comes mainly from the Netherlands, Germany, Austria and Sweden. But the EU recovery plans and the ECB's interventions seem to indirectly introduce corana bonds, it could be argued.

The above described EU measures and the enormous sums of money involved are putting solidarity between the EU Member States to the test. The emergence of these programs seems to bring the EU closer to a transfer union. Within a transfer union , weak member states are permanently supported by strong member states, critics claim.

The possible risks are increasingly causing concern among, for example, Dutch and German policymakers and public opinion about the emergence of an EU transfer union.

Before the above package was concluded, Spain, for example, stated plainly that the Dutch attitude showed a lack of solidarity: "The Netherlands is putting the future of the European Union at risk," said the Spanish Prime Minister.

But is the resistance against the idea of a transfer union as such justified?

Some pension funds in particular seem attractive lenders of loans due to the large assets under management some of them have. Through loans to EU funds - such as through Eurobonds - pension funds (indirectly) invest in other member states. This might help their economies, but in the end – due to the functioning of the internal market – also their ‘own’ economies. Since member states of the EU as a group responsible for debts, the risks for these pension funds seem limited and the return on the loans may be high. Some therefore call Eurobonds a good idea.

However, it is important to investigate how and under what conditions pension funds’ assets flow across Europe within a possible transfer union. For some citizens, the choice for a transfer union - whereby the member states guarantee each other's pension debts - may be incomprehensible and seems a bad idea. Opponents of Eurobonds can argue that the policy of the ECB does not help; it keeps interest rates artificially low, causing further problems for pension funds.

But is that really so? How does a transfer union work exactly? Within the European supervisory body for pension funds , EIOPA , where I am a Member of the OPSG, I will try to seek – on my own initiative- an answer to these questions. I hope to present the findings soon.

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