Definition and fundamentals of Corona Bonds
Corona Bonds refer to a special form of bonds that were discussed as joint debt securities at the European level in the context of the coronavirus pandemic. The concept aimed to enable joint borrowing by European states to address the economic consequences of the COVID-19 crisis. These securities were intended to make a central contribution to financing stimulus measures, maintaining economic stability within the European Union (EU), and preventing fragmentation of the European single market.
Legal background
Foundations in European law
Corona Bonds concern crucial areas of European law, especially the law of the European Economic and Monetary Union. As jointly held government bonds, the concept touched upon Articles 125 and 136 of the Treaty on the Functioning of the European Union (TFEU):
- Article 125 TFEU contains the so-called “no-bailout” clause, which fundamentally excludes mutual financial liability between Member States.
- Article 136 TFEU enables euro area states to introduce closer coordination measures, for example to improve fiscal discipline.
A key issue in the legal discussion was to what extent the issuance of Corona Bonds would be compatible with these treaty provisions and whether treaty amendments would be required if necessary.
National legal systems
If Corona Bonds had been issued, additional national approval requirements would have been affected. In Germany, for example, the Bundestag would have had to approve participation in joint bonds, since these affect the budgetary rights and the budgetary autonomy of the parliament.
Functioning of planned Corona Bonds
Corona Bonds could have been issued by a European institution—for example, the European Investment Bank (EIB) or a specially established consortium. The eurozone Member States would have jointly guaranteed interest and principal payments. The funds raised would have been passed on to the affected states or to EU institutions to finance specific crisis measures.
Difference to existing instruments
Even before the Corona pandemic, forms of joint borrowing existed in the form of the European Stability Mechanism (ESM) and bonds issued by the European Investment Bank (EIB). Corona Bonds, however, differed in that Member States would have been directly and jointly liable for repayment—a significant legal and fiscal innovation compared to previous EU debt securities.
Legal challenges and points of dispute
Debt union and fiscal union
The issuance of Corona Bonds would legally have represented a step toward a fiscal union at the EU level. This would have required far-reaching expansions of competencies for EU bodies and closer fiscal cooperation between the Member States.
Liability distribution
A central legal issue was the structuring of the liability framework. The debate revolved around the question of whether a joint (joint and several) liability of all eurozone countries would constitute an inadmissible assumption of third-party liabilities. The differentiation between proportional and joint and several liability played a decisive role here.
Compatibility with principles of democracy and budgetary law
The issuance of Corona Bonds would have affected national and European budgetary (procedural) law. In particular, since national budgetary sovereignty—a core area of democratic sovereignty—would have been affected by joint debt securities, questions of democratic legitimacy and control were central to the legal assessment.
Development and discussion in the European context
Government and parliamentary decisions
In 2020, several Southern European states, including Italy and Spain, called for the introduction of Corona Bonds, while countries such as Germany, the Netherlands, and Austria opposed joint liability. Within the framework of the European legal order, this controversy led to intensive negotiations at the level of the European Council and the Eurogroup.
Alternative instruments
Following controversial legal and political discussions, the “Next Generation EU” program was established as an alternative, with a focus on the “Recovery and Resilience Facility” (RRF). For the first time, the European Commission raised joint debt on a large scale for this program; however, liability formally remains with the Member States in their respective shares.
Legal assessment and outlook
Implications for the European legal order
The issuance of Corona Bonds would have shifted the character of the EU towards a more integrated financial and fiscal entity. Their introduction would possibly have required adjustments to the European founding treaties or at least new legal acts with far-reaching binding effect.
Precedent effect and further developments
Although Corona Bonds have not been implemented, the establishment of joint European debt securities to overcome the pandemic has brought significant momentum to the development of EU financial law. Future crises may again place the discussion about joint bonds and their legal foundations at the center.
References
- Treaty on the Functioning of the European Union (TFEU), in particular Art. 125 and 136
- European Council, Conclusions on COVID-19 and economic policy measures 2020
- German Federal Ministry of Finance: Joint European Debt—Questions and Answers, 2020
- European Commission: Next Generation EU—Legal Foundations and Instruments, 2021
This article provides a comprehensive legal classification and examination of Corona Bonds in the context of the EU and gives an overview of the legal implications, challenges, and the development of joint European debt securities.
Frequently Asked Questions
What legal foundations exist for the introduction of Corona Bonds within the European Union?
Corona Bonds are a special form of joint bonds, the introduction of which within the European Union is governed in particular by the EU treaty framework, above all the Treaty on the Functioning of the European Union (TFEU). In particular, Article 125 TFEU (the so-called “no-bailout clause”) prohibits the assumption of financial commitments of one Member State by the Union or other Member States. The introduction of joint bonds therefore requires a specific legal basis, which would have to be created via primary law amendments, unanimous decisions, or new secondary law acts. The existing financing mechanisms of the EU, such as the European Stability Mechanism (ESM) or the Own Resources System, currently allow joint borrowing only to a limited extent and under strict conditions. Any introduction of Corona Bonds would therefore have to be carefully examined for compatibility with the applicable treaties and could entail the need for a treaty amendment.
How does the legal obligation of Member States under Corona Bonds differ from that under conventional government bonds?
The legal obligation of Member States in Corona Bonds fundamentally differs from that in the issuance of national government bonds. While the latter are secured exclusively by national law and each country’s own payment capacity, Corona Bonds would be issued jointly, resulting in collective liability or at least a shared understanding of liability among participating states. Depending on the structure, Member States could be held liable under a “joint and several liability” model or a proportional liability model. The concrete legal construction would significantly determine responsibility in cases of default by individual states and would have direct effects on fiscal rights, sovereignty, and existing European legal principles. In addition, the execution of any creditor claims would have to be embedded in a cross-border European legal system, which entails high legal complexity.
What would be the consequences of introducing Corona Bonds for the budgetary sovereignty of Member States?
The introduction of Corona Bonds would significantly affect the budgetary sovereignty of Member States, as it involves the mutualization of debt and thus at least a partial loss of independent fiscal control. According to the constitutional frameworks of many EU countries, especially Germany (Art. 109 et seq. GG), fiscal sovereignty and national debt are traditionally subject to exclusive legislation and control by national parliaments. A system of joint liability under Corona Bonds would require new supervisory and participatory rights at the EU level, which may conflict with national reservations of sovereignty. Constitutional reviews, such as by the Federal Constitutional Court in Germany, could also be relevant if powers are transferred to the EU without adequate democratic legitimacy at the European level.
Under what conditions could Corona Bonds be compatible with the no-bailout clause of Article 125 TFEU?
The compatibility of Corona Bonds with the no-bailout clause is contested and depends in particular on the specific structuring of liability rules. Under Article 125 TFEU, the Union or any Member State is not liable for the liabilities of another state. A violation of this clause could exist if Corona Bonds lead to a direct or indirect transfer of debt between states. In theory, a construction would be possible where the liability risk is strictly apportioned and limited, or is provided with explicit rights of recourse, to avoid automatic assumption of liability. In addition, Corona Bonds could only be issued with the consent of all affected states and, where necessary, by amending primary law. There remains, however, interpretative leeway, especially if the issuance of such bonds is carried out by EU bodies for an expressly defined purpose and clear repayment mechanisms are in place.
What role do national constitutional courts play in the implementation of Corona Bonds?
National constitutional courts, such as the German Federal Constitutional Court, play a central role in the implementation of Corona Bonds as they examine compliance with national constitutional requirements regarding budgetary autonomy, parliamentary prerogative, and the transfer of sovereign rights. Especially in Germany, EU measures may not undermine the Bundestag’s national budgetary rights or result in uncontrolled liability. Based on previous rulings on mechanisms like the ESM and ECB policy, it can be assumed that comprehensive control mechanisms, transparency, and parliamentary involvement are prerequisites for legality. Similar reviews could take place in other Member States, which may considerably complicate the implementation of Corona Bonds.
Which secondary law instruments of the EU could be used to implement Corona Bonds?
Various secondary law instruments of the EU could be used to implement Corona Bonds, including regulations under Article 122 TFEU, Council decisions, or the establishment of specific funds (e.g., Recovery and Resilience Facility). The basis could also be an intergovernmental agreement within the framework of special mechanisms such as the EFSF/ESM. In any case, it must be ensured that the chosen instrument falls within the scope of the EU’s current competence structure and does not conflict with the treaties or national constitutions. The need for parliamentary involvement at both the EU and national level must also be taken into account, especially if budgetary rights are affected. In practice, such bonds could take the form of loans raised by the European Commission in the name of the EU, as has already occurred with the ‘Next Generation EU’ program, which could serve as a precedent.
How could legal oversight and legal protection be structured in disputes related to Corona Bonds?
Legal oversight and protection in disputes related to Corona Bonds would primarily have to be structured in accordance with the European legal system. The main responsibility would lie with the European Court of Justice (ECJ) within its competence for interpreting and overseeing the European treaties (Art. 267, 258 et seq. TFEU). National courts may also refer questions to the ECJ. In the case of purely intergovernmental agreements, arbitration clauses or ad hoc tribunals could be envisaged, although this could impair legal certainty and coherence with Union law. To protect the interests of creditors, inclusion of rules such as Collective Action Clauses (CACs) would also be advisable to allow orderly restructuring procedures in crisis situations. The specific structure of the legal protection mechanism would be decisive for the acceptance and functionality of Corona Bonds both in the capital market and at the political level.
