By embracing perpetual bonds – or Consol, as it is known in the United Kingdom and the United States – George Soros believes the EU can overcome the two COVID-19 crises and climate change currently threatening the world. In this question and answer, he argues that Consol presents a preferred alternative to increasing the EU budget. The European Commission must accept it as an interesting idea that needs further consideration.
SYNDICATE PROJECT: Will the negative impact of coronavirus on the Eurozone economy last long?
GEORGE SOROS: Longer than most people think. One problem is that the virus itself is growing rapidly and changing the way it attacks on human organs. This will complicate the development of reliable vaccines.
PS: Some people have proposed that the European Union issue what are called coronabonds. You have promoted the idea of eternal bond. Why is a lasting bond better and what risks do it pose?
SOROS: The European public and their political leaders are not accustomed to eternal ties or Consol, as I now like to call it, but Consol is well-known in the UK and US. They have a long history in both countries. In England they were used, among other things, to finance the war against Napoleon and the First World War. In the US, they were introduced in the 1870s.
Interestingly, the Dutch water council issued a lasting bond in 1648 to repair dykes. This made the Netherlands the originator of that idea. More than 350 years later, the bonds are still paying interest, but the general public is not aware of it. At that time, the Netherlands faced an existential threat from flooding. At present, the combination of COVID-19 and climate change poses a greater threat.
As the name suggests, the principal amount of an eternal bond does not have to be paid off; only annual interest payments are due. A € 1 trillion bond will cost € 5 billion per year, assuming an interest rate of 0.5%. Consol does not need to be sold at once; they can be issued in stages and they will be taken by long-term investors such as life insurance companies who are looking for long-term bonds to match their obligations.
As markets familiarize themselves with new instruments, the next stage will attract a larger number of buyers and eventually bonds will take a premium. This is a good time to issue long-term bonds. Germany recently sold 30-year government bonds with negative yields.
Unfortunately, my suggestion for an eternal bond has been confused with “coronabonds” and this has poisoned the debate. The two have nothing to do with each other. Coronabond is expressly rejected, and with good reason, given that they require a level of mutualisation that is totally unacceptable.
That is why I am now talking about Consol. The only mutual obligation is the payment of annual interest, which can be ignored. A total of € 5 billion per year yields the much needed € 1 trillion – a very low cost-benefit ratio of 1: 200! This level of mutualisation must be readily accepted by member states acting unanimously or through a willing coalition.
Understandably, the so-called Frugal Four (Netherlands, Denmark, Sweden, and Austria) wants to keep its contribution to the European budget to a minimum. However, they are now faced with a choice: they can continue to oppose Consol and accept a doubling of the budget. Or they can become enthusiastic supporters of the Console and, if they are successful, increase their contribution to the budget by 5%. I urge the Hanseatic League and the Dutch public to ponder which alternatives are preferred.
PS: Are there legal issues related to the issuance of Consol, as you would call an eternal bond?
SOROS: Yes, there are, and they seem insurmountable. The EU must maintain its AAA rating, otherwise the bonds cannot be sold. That requires the EU to have enough so-called “own resources” – taxes that can be levied to cover the cost of servicing bonds. Imposing taxes is a long and drawn-out process, because every country has its own rules and in some countries, like Belgium, the rules are very complicated. The process will take several years and that is why I say that legal obstacles seem insurmountable.
But there is a solution. Taxes only need to be passed; they don’t need to be implemented. Authorization must take several weeks, not several years. Once they are ratified, the EU can go ahead and issue bonds or ongoing Consol.
Eternal bonds have exceptional advantages over bonds that have a termination date. As the name suggests, the principal does not have to be repaid; only annual interest is paid. As I mentioned before, that number is very minimal so it must be easily subscribed to by member countries.
That must be very interesting for the Hanseatic League, led by the Dutch. That is why the Hanseatic League must be an enthusiastic supporter. In Germany, Angela Merkel is still Chancellor, and she is the only person who can rule out the ordoliberal establishment. With their support, the European Commission can accept Consol as the desired alternative to be explored, but the time is very short. Instruments that were previously unknown at all need to be understood and adopted.
PS: If the eternal bond is denied, then what do we do?
SOROS: Extraordinary circumstances require extraordinary actions. A perpetual bond or Consol is such a measure. They should not be considered in normal time. But if the EU cannot consider it now, it might not be able to withstand the challenges it faces today. This is not a theoretical possibility; maybe it’s a tragic reality.
The corona virus and climate change threaten not only the lives of people, but the survival of our civilization.
The European Union is very vulnerable, because it is based on the rule of law and the wheel of justice turns slowly. In contrast, coronavirus moves very quickly and in unexpected ways.
That is why the European Union needs to issue eternal bonds. Issuance of bonds with a cost-benefit ratio of 1: 200 opens up tremendous fiscal space. The money raised does not have to be distributed according to the so-called fiscal keys (shareholding of member states in the ECB). This can be allocated to those who need it most. Most of the money will go to southern European countries, because they are the hardest hit, and in those countries they can help those who are most in need and most needed, such as unregistered agricultural workers. Some of this has already happened, but the amount of money available will greatly increase.
PS: Turning to England, can Brexit be avoided? What can or should the EU do to stop other member states from leaving?
SOROS: There’s no point in crying over spilled milk. But the question of how to prevent other countries from joining the UK is important.
I am particularly concerned about Italy. Matteo Salvini, leader of the Lega party, agitated for the country to leave the euro and the European Union. Fortunately, his personal popularity has declined since he left government, but his defense gained momentum.
What is left of Europe without Italy? Italy was once the most pro-European country. Italians trust Europe more than their own governments, and with good reason. But they were mistreated during the 2015 refugee crisis. The European Union enforces the so-called Dublin Regulations that place all burdens on the countries where refugees first landed, and do not offer any financial sharing.
It was then that the Italians decided to choose Lega and the Five Star Salvini Movement in a landslide manner. More recently, easing of state aid rules, which benefit Germany, has been very unfair for Italy, which has become a sick person in Europe and then hardest hit by COVID-19.
PS: Have you given up?
SOROS: Not all. As long as I can come up with ideas like eternal bonds, I don’t give up.
I do not want to criticize the non-paper issued by the Frugal Four countries, because it was written without awareness of the benefits of an eternal bond or Consol. The Spanish government proposed the idea on April 23 at a virtual meeting of the European Council, but was rejected without consideration because the eternal bond was confused with coronabonds.
That’s why I now prefer to talk about Consol. One of Consol’s strengths is that the funds raised can be distributed not in accordance with the fiscal key, but allocated to those who need it most. Another advantage is that Consol can help to fight not only viruses, but also climate change. That will allow the EU to meet the expectations of its citizens.
If the member states only pursue their own interests, the European Union will be destroyed and we will all be harmed. Fortunately, non-papers only express the views of governments that have not been debated and approved by parliament – and the government can change their views when they consider the benefits of Consol. Consol will give them what they are looking for, a budget that only increases a few percentage points and avoids all complications related to grants or loans that non-paper must fight for. Consol will also give Frugal Four something they seem to have forgotten: strengthening the European Union rather than disintegration. The EU needs a strong demonstration of solidarity.