![\"Graph](\"https:\/\/bst-europe.eu\/wp-content\/uploads\/sites\/24\/2026\/07\/Graph-1.-Direct-fiscal-expenditures-in-response-to-Covid19-in-of-GDP.png\")
All member states of the EU are having to impose shutdowns. But the impact of COVID-19 will be asymmetric, for three reasons.<\/p>\n
First, the health impact may be different across countries, for various reasons. Italy was unfortunate that it was hit first among European countries, without being able to draw on lessons other than those from China. Differences in social interaction across the EU may also have contributed, as well as different healthcare structures and funding.<\/p>\n
Second, the economic structure of EU countries differs. Some member states such as Germany are heavily reliant on manufacturing, others on services, especially tourism. Manufacturing not only stands a good chance of making a full and relatively swift recovery; there is also a good chance for some pent-up demand, as some purchases will be postponed. Services, on the other hand, stand to suffer for a longer period: customers may continue to fear infection, and are less likely to make up for foregone purchases: customers are unlikely to go to the restaurant twice because they missed out on a visit during the lockdown. More services- and tourism-oriented economies will therefore be hit harder.<\/p>\n
Third, countries start from different positions. Italy was already struggling economically, and labouring under a debt burden of over 130% of GDP. In Spain, unemployment still stood at 14% as a result of its long-lasting economic crisis. Not all countries are therefore in a position to shake off a public health crisis without considerable long-term economic damage.<\/p>\n
2 Three scenarios for Europe\u2019s economic response<\/h2>\n
For these reasons, Italy and Spain are likely to suffer most, both economically and in terms of health outcomes. This leads to the following three scenarios for the economic response to the crisis in Europe.<\/p>\n
2.1 Scenario 1: Timidity and divergence<\/h3>\n
Countries in the EU enact support and stimulus packages according to their respective economic and fiscal strength. Countries with high debt burdens and struggling economies, such as Italy or Spain, implement the most urgent support measures only; while economically and fiscally strong countries support their firms and work- ers generously, and stimulate a swift recovery after the lockdown ends.<\/p>\n
As a result, economic fortunes in Europe diverge drastically, as some member states limit the economic fallout and generate a proper recovery, while others see a sizable part of their private sector go into bankruptcy, leading to mass unemployment and long-term economic scars. The effect on public debt in the most vulnerable countries is uncertain: a timid response to the unfolding economic crisis could well make public debt (relative to GDP) increase faster than a bolder policy response and stimulus. In any case, this is a nightmarish scenario for Europe. Divergences of economic fortunes within the Single Market were already substantial before the crisis. In this scenario, they would become politically untenable and would give rise to economic nationalism in countries like Italy, probably leading to calls for an exit from both the Single Market and the euro. Worsening economic prospects in some countries would also have negative spill-over effects on other member states, as bankruptcies would raise the cost of imports, and there would be lower demand for exports.<\/p>\n
2.2 Scenario 2: Overburdening vulnerable member states<\/h3>\n
The ECB\u2019s PEPP and access to the ESM convince all countries that their response to the ongoing crisis should be as bold as is necessary to minimise the economic fallout. For the reasons noted above, that bolder response may lower public debt relative to scenario 1. But countries will end up with a much higher debt burden. As the ECB withdraws PEPP support, markets may reassess whether Italian or Spanish debt is sustainable.<\/p>\n
The ECB\u2019s PEPP programme was the right thing to do and can be defended on legal grounds4, but the ECB is still barred from financing governments directly. Monetising public debt is therefore the absolute last resort, and may be impossible politically. Rapid reductions in debt ratios through post-crisis growth is unrealistic for countries with low growth potential. In this scenario, some member states may be constantly in danger of losing access to financial markets, which would inevitably undermine their growth prospects further. Resolution may come through a restructuring of one or several member states\u2019 public debt, or countries might need constant support by the ECB. This scenario is also unviable for Europe.<\/p>\n
2.3 Scenario 3: Burden sharing<\/h3>\n
Scenarios 1 and 2 are likely to break the political fabric of the EU. The only viable scenario involves sharing the burden of the COVID-19 crisis among all EU member states. In the current situation, countries need to be able to spend what is needed without ending up on the cusp of an unsustainable debt burden. Europe needs political agreement on the principle that a large part of the costs of the pandemic has to be shared in a way that all countries can take the necessary measures without being financially overwhelmed. Then member states can agree on an economically and legally sound instrument that is capable of delivering this kind of burden sharing.<\/p>\n
In the following, we outline what such an instrument could look like.<\/p>\n
3 The Pandemic Solidarity Instrument<\/h2>\n
We propose a one-off common EU crisis response that is tailored to this specific crisis. Burden sharing in this crisis should not permanently alter the financial architecture of the EU or of the Eurozone. Nor do we need to create new institutions. The aim is to ensure that the old institutional setup has a reasonable chance of surviving this crisis. It also aims to give all countries the certainty they need to spend as the crisis requires. Otherwise, we may end up in scenario 2, with highly indebted countries doing too little, causing long-term economic damage. To provide this certainty, burden sharing has to be agreed now, not in a few months.<\/p>\n
Through our Pandemic Solidarity Instrument, the EU would raise the necessary funds in markets on its own account. It would spend those funds in four ways: to cover costs directly related to fighting the virus; to strengthen the EIB; to sub- sidise short-time work schemes; and to co-finance national stimulus packages once economies are opening up again. The Instrument would be set up under Ar- ticle 122 of the Treaty on the Functioning of the European Union. The box below explains in detail the legal implications.<\/p>\n
This is how the Instrument would work in practice.<\/p>\n
3.1 Expenditure<\/h3>\n
\u2022 All countries should have the necessary means to finance the health-related costs of this crisis. \u20ac20 billion of the funds raised by the Instrument should be made available to member states to cover COVID-related healthcare costs, such as the purchase of additional ventilators, protective gear and the set-up of new intensive-care units. The Instrument would cover 80% of eligible expenditures while member states cover the remaining 20%.<\/p>\n
\u2022 Companies should receive the necessary liquidity throughout the Union to survive the lockdown. The European Investment Bank (EIB) has proposed an EU-wide scheme to this end and has asked members for \u20ac25 billion in guarantees to fund liquidity support of about \u20ac200 billion. This is a good start, but too small to have a sizable effect throughout Europe. Initially, Germany\u2019s liquidity programme via its public investment bank KfW had a volume of about \u20ac465 billion, but it is now unlimited. Since Germany makes up 25% of EU-27 GDP, an EU-wide scheme should aim for liquidity support of at least \u20ac1.8 trillion. The EIB should provide half of this support, with the other half provided by national governments and public investment banks. To this end, the EIB should receive about \u20ac120 billion of the Instrument\u2019s funds in the form of direct guarantees from the EU.<\/p>\n
\u2022 The EU should support efforts that help Europeans keep their jobs during the containment phase, such as the French \u2018ch\u00f4mage partiel\u2019 or Germany\u2019s \u2018Kurzarbeit\u2019 (short-work) scheme. Such schemes already exist in many member states and could be introduced in more. For every worker that is furloughed under such a scheme, the EU should contribute up to 40% of the net salary as long as member states match this. In addition, all member states should receive a subsidy of short-term unemployment benefits of up to 25% of the net salary as long as the subsidy is matched by the member state for the first six months of unemployment. Pay-outs here would depend on labour market developments in member states. It is impossible to estimate ex ante the cost of this scheme, given the uncertainty about the size and duration of the impact of COVID-19. The German \u2018Kurzarbeit\u2019 cost about \u20ac4.6 billion in 2009, with 1.1 million beneficiaries. A ballpark estimate is that uptake in the German Kurzarbeit scheme in this crisis could well end up 3 times higher than in 2009. In 2009, Germany also paid out \u20ac17 billion euros in unemployment benefits in a situation where job losses were comparatively limited. Taken together, these figures lead us to estimate a minimum EU-wide need of about \u20ac30 billion for short-term work schemes and about \u20ac70 billion for short-term unemployment benefits, thus bringing funding needs to \u20ac100 billion.<\/p>\n
\u2022 All countries will need to deploy substantial fiscal stimulus once containment measures can be gradually lifted. Some countries will need more than others. The more an economy relies on sectors in which pent-up demand is unlikely (in particular services such as tourism), the more the state will have to stimulate spending. The EU should support such measures: our Instrument should fund 50-75% of eligible fiscal stimulus measures. Measures should be eligible if they have a clear stimulating effect; are not undermining EU goals such as the fight against climate change; and have tangible spill-overs to the rest of the Union. The overall envelope per country should be calculated based on the GDP shortfall in the first half of this year. The more dependent the economy is on sectors that are unlikely to see catch-up effects, the larger co-financing should be. If we assume that the necessary stimulus will be 2% of EU GDP and an average co-financing of 65%, this brings us to an envelope of about \u20ac200 billion.<\/p>\n
Altogether, this means that the EU would need additional funds of about \u20ac440 billion to be spent over the coming 12 months.<\/p>\n
3.2 Funding<\/h3>\n
The EU should borrow the funds in the market. It would issue a one-off Pandemic Solidarity Bond backed by the EU budget with long maturities of 20-50 years. To raise \u20ac440 billion, the EU would need to receive irrevocable and unconditional guarantees from member states.<\/p>\n
These guarantees could, in principle, follow the model of the European Financial Stability Facility (EFSF), which was set up as a temporary lending facility during the euro crisis. The guarantee structure of the EFSF proved financially solid and has the advantage that it has already been tested during adverse market conditions. However, the EU would remain the bond issuer and would be liable to repay it. It could draw on the guarantees if need be, but it could potentially make good on its liability by other means. This is important. The EU is an institution with its own capacity to act, and therefore, the guarantees would not count as member states\u2019 individual debt by Eurostat. This is a major advantage compared to all variants that rely on extra-institutional setups such as special purpose vehicles (SPVs), as guarantees to SPVs are counted as national debt. The legal act setting up the asset and establishing the guarantees would need to be ratified by some national parliaments, such as the German Bundestag.<\/p>\n
The bonds could be perpetually refinanced in the market when they come due, leaving the guarantees in place. But the legal act should contain a provision that regulates how the bonds are repaid, should member states decide to do so when the bonds come due. We propose a simple solution here: member states should be liable for repayment not according to their share of the guarantees, but according to their share in EU GDP at the time of repayment. A 30-year bond would thus be repaid by member states according to their economic strength in 2050. So the Instrument would have a guarantee structure to give the EU the solid legal basis for cases of default – and a repayment structure that ensures that the strong end up supporting the weak, whichever countries those will be in the distant future.<\/p>\n
The Pandemic Solidarity Bonds would not only finance the measures above. They would also substantially enlarge the volume of supranational safe assets that the ECB could buy in its purchase programmes and that banks could pledge as collateral. At the same time, markets would be able to absorb such a large sum of new, safe assets and fund the Instrument at similar rates to those of the ESM.<\/p>\n
![\"Graph](\"https:\/\/bst-europe.eu\/wp-content\/uploads\/sites\/24\/2026\/07\/Graph-2.-ESM-yield-curve-in-.png\")
<\/p>\n
The legal underpinning of our proposal<\/h4>\n
Article 122 TFEU provides the EU with a legal basis to enact extraordinary measures under \u201cexceptional occurrences\u201d. Article 122 TFEU has two prongs: while Article 122(1) allows the EU to take measures appropriate to the economic situation \u201cin the spirit of solidarity\u201d, Article 122 provides a legal basis for ad hoc financial assistance to one or more member states. There is no doubt that the current COVID-19 pandemic and the ensuing economic crisis constitutes the type of exceptional occurrence that Article 122 TFEU sought to address. One may even go as far as arguing that there has never been a more urgent need to make real the overarching principle of solidarity enshrined in the EU Treaties.<\/p>\n
Since Article 122 TFEU provides an exception from other primary law provisions, such as the no-bailout clause, it is not limitless: it must be narrowly framed and follow the subsidiarity principle. Given that the COVID-19 pandemic affects the Union as a whole and causes severe economic disturbances in all member states, there should be little doubt that collective action is necessary. With respect to the type of measures that may be taken on the basis of Article 122 TFEU, the Council has a wide margin of discretion. The main requirement is that the measures need to be \u201cappropriate to the economic situation.\u201d Given the unprecedented disruptions that the pandemic has already caused, even highly extraordinary common economic measures are likely to be deemed appropriate.<\/p>\n
With respect to the law-making process, the Council decides with qualified majority on Article 122 TFEU measures following a proposal by the Commission, which can take the form of either a directive or a regulation.<\/p>\n
The European Parliament has no formal role in the legislative process stipulated by Article 122 TFEU. However, national parliaments will have to play a strong role according to national constitutional requirements if the legal act under Article 122 involves guarantees provided by member states, as we propose here. This means that although theoretically legal acts under this article can be adopted by a qualified majority in the Council, some parliaments, such as the German Bundestag, will have to ratify the act to comply with domestic constitutional law.<\/p>\n
In the case of our proposal, Article 122 TFEU provides an exception with regard to two relevant primary law provisions: The no-bailout clause (Article 125 TFEU) and the prohibition for the EU budget to go into deficit (Articles 310 and 311 TFEU).<\/p>\n
Article 125 TFEU \u2013 no bailout clause<\/strong><\/p>\n Article 122 TFEU can be understood as an exception to the no-bailout clause. More specifically, Article 122 TFEU epitomizes the principle of solidarity among member states in cases where the economic situation in one or more member states warrant exceptional measures by the EU. The solidarity clause would thus counterbalance the strict no-bailout clause with a view at allowing collective action in certain exceptional circumstances.15 In this re, we must also differentiate between Article 122(1) and Article 122(2). While Article 122(1) focuses on measures taken in the spirit of solidarity, Article 122(2) talks specifically about \u201cfinancial assistance.\u201d For the purpose of a Pandemic Solidarity Instrument, the former provision seems more suitable, since the measures we propose go beyond \u201cfinancial assistance\u201d in the strict sense of the word, i.e. beyond the mere granting of loans. Relying on Article 122(1) TFEU also seems more appropriate in light of the new instrument\u2019s objective, not least since (only) Article 122(1) explicitly refers to measures taken \u201cin the spirit of solidarity.\u201d Finally, Article 122(1) TFEU also provides more flexibility against the back- drop of the European Court of Justice\u2019s Pringle judgement. Pringle raises some questions as to the precise meaning of \u201cfinancial assistance\u201d under EU law and leaves some uncertainty whether Article 122(2) requires conditionality. This is not to say that Article 122(2) TFEU is unsuitable, but rather that Article 122(1) TFEU provides a superior legal basis for the instrument we propose.<\/p>\n Article 310 and 311 TFEU<\/strong><\/p>\n The other relevant provision is Article 310 TFEU which stipulates that all revenue and expenditure of the Union have to be shown in the EU budget and that the EU budget has to be balanced. As our proposal entails grants, i.e. direct expenditure, one could argue that these have to be financed by actual contributions and cannot be financed by bonds issued by the EU. However, this argument is not convincing. As explained above, Article 122 TFEU gives the Union wide discretion to act \u201cin the spirit of solidarity\u201d and Article 311 TFEU stipulates that \u201cthe Union shall provide itself with the means necessary to attain its objectives and carry through its policies.\u201d In the current situation, it would be very hard to argue that any meaningful act of solidarity can be taken by the Union without fresh money and it would be equally hard to say that this fresh money can come from member states\u2019 direct contributions at a time when all member states have to turn to markets to finance their own expenditures. In this context, raising funds from bond sales by the Union that are backed by member states\u2019 guarantees to finance emergency expenditure should qualify as \u201cmeans necessary\u201d for the Union to be able to reach the solidarity objectives pursuant to Article 122 TFEU. All revenues from the bond sales would then count as normal revenues of the EU budget and potential interest payments on bonds issued to finance the new instrument would count as normal expenditures. To be sure, just like measures based on Article 122(1) TFEU, any financing by EU member states outside the ordinary budgetary process must be limited in time and in scope to fighting the extraordinary threat that the COVID-19 outbreak poses to the Union and its members.<\/p>\n Our proposal would not fully mutualise the costs of this crisis. Doing so may seem justified, but would not be politically feasible. All member states will thus have to finance a portion of their additional fiscal expenditure on markets. They will face different funding costs when doing so.<\/p>\n With the PEPP, the ECB has intervened forcefully in government bond markets and will continue to do so until the European economy has recovered. But the ECB should not be the only backstop for member states\u2019 access to markets. There are political and legal limits to ECB bond purchases. On 5 May 2020, the German Constitutional Court will deliver its judgment on the ECB\u2019s QE programme and this could lead to doubts about the legality of PEPP if the Court puts severe limits on the Bundesbank\u2019s participation in QE. What is more, the ECB will face questions about whether mass purchases of government bonds are still legitimate when they mostly serve the purpose of keeping member states afloat. The ECB has no legal or political mandate to fully mutualise or even monetise European public debt.<\/p>\n This is why additional lines of defence for member states\u2019 financing are necesary. Given the severity of the crisis, such transfers are justified, above and beyond the risk sharing in the Instrument outlined above. The Commission\u2019s SURE proposal is a good start \u2013 a credit line of up to \u20ac100 billion to support countries\u2019 fight against unemployment. A special COVID credit line19 in the ESM would further help countries finance their increased debt burdens. A credit line of \u20ac100 billion credit would reduce Spain\u2019s interest costs by \u20ac100 billion over a 10 year period, for example.20 Both the SURE proposal and a special ESM line would entail some transfers, as lending rates and funding conditions in both are subsidised by the fiscally strong countries in the EU. But given the severity of the crisis, such transfers are justified, above and beyond the risk sharing in the Instrument outlined above.<\/p>\n The Pandemic Solidarity Instrument would provide more vulnerable member states with enough fiscal relief to act as forcefully as economically strong countries. Action cannot be left to a \u201csecond phase\u201d of crisis fighting further down the line \u2013 member states need that certainty today that they will have the necessary fiscal space in a few months\u2019 time. The proposal does not create a \u2018transfer union\u2019 feared by some in Germany, the Netherlands and elsewhere, nor open-ended debt mutualisation. It is sizeable but proportionate, since COVID-19 could result in an existential crisis for the European project.<\/p>\n About the authors<\/strong><\/p>\n Lucas Guttenberg heads our Europe programme as its Director. His own research focuses on the EU budget, EU economic and fiscal policy coordination, Germany\u2019s role in the EU and the Franco-German relationship.<\/p>\n Sebastian Grund is a legal counsel at the International Monetary Fund (IMF).<\/p>\n Christian Odendahl joined The Economist<\/em>\u00a0in 2022 as European economics editor, covering Europe\u2019s economic integration, monetary and fiscal policies and broader economic trends.<\/p>\n","excerpt":" EU member states must share the burden of the fiscal costs of the COVID-19 pandemic. The Pandemic Solidarity Instrument delivers […]<\/p>\n","thumbnail":"https:\/\/bst-europe.eu\/wp-content\/uploads\/sites\/24\/2026\/07\/95612_AdobeStock_333090694_KONZERN_ST-LW.jpeg","thumbnailsquare":"https:\/\/bst-europe.eu\/wp-content\/uploads\/sites\/24\/2026\/07\/95612_AdobeStock_333090694_KONZERN_ST-LW.jpeg","authors":[{"id":34874,"name":"Lucas Guttenberg","link":"https:\/\/bst-europe.eu\/blogger\/lucas-guttenberg\/"},{"id":40254,"name":"Sebastian Grund","link":"https:\/\/bst-europe.eu\/de\/blogger\/sebastian-grund\/"},{"id":40248,"name":"Christian Odendahl","link":"https:\/\/bst-europe.eu\/de\/blogger\/christian-odendahl\/"}],"categories":[{"id":598,"name":"Investment & Budget","link":"https:\/\/bst-europe.eu\/category\/investment-budget\/"}],"tags":[{"id":202,"name":"eu","link":"https:\/\/bst-europe.eu\/tag\/eu\/"},{"id":263,"name":"European Union","link":"https:\/\/bst-europe.eu\/tag\/european-union\/"},{"id":151,"name":"Publications","link":"https:\/\/bst-europe.eu\/tag\/publications\/"}]}3.3 Necessary measures beyond the Pandemic Solidarity Instrument<\/h3>\n
Conclusion<\/h2>\n