A more contagious variant of Covid-19 has created a new emergency, so all the countries that can, ought to issue perpetual bonds to pay for the cost of fighting the virus. The prime candidates for this are the United Kingdom and the so-called Frugal Five: Austria, Denmark, Finland, the Netherlands and Sweden.
These are not normal times. The pandemic has created an emergency situation because the authorities have been unable to bring it under control quickly enough to avoid a global economic shock. The epidemic will soon be brought under control by a remarkable feat of epidemiology and medical science. A number of vaccines will become widely available within a year. In the meantime, however, the virus has wrought havoc, with an economic impact worse than the 2008 financial crisis. That requires a bold economic response.
Europe’s response has, unfortunately, fallen short. The reasons for this failure can be ascribed to the complicated relationship between the EU’s central institutions and its member states.
I have long championed perpetual bonds. These are bonds that never have to be repaid; only the annual interest needs to be paid. To some, this may sound like a radical idea, yet perpetual bonds have been used for centuries. Britain issued perpetual bonds, called “Consols” in 1752 and later used “war bonds”, which were also perpetual, to finance the Napoleonic wars. The US issued Consols in the 1870s.
Perpetual bonds ought to be introduced now, when global interest rates cannot fall any lower. They would lock in that advantage forever. They could be introduced gradually to allow financial markets to familiarise themselves with a new instrument. This presents no problem because an undated bond can be easily sold in tranches.
Until recently, I advocated that the European Union, rather than its member states, should issue perpetual bonds. I now recognise that this is impossible in the current circumstances. Despite a number of important political breakthroughs, the EU has not been endowed with sufficient taxing power to finance the kind of fiscal stimulus that would be required to deal with the pandemic.
In this situation, the European governments themselves must expand their own capacity for a muscular fiscal response to the pandemic. That is why individual countries should issue perpetual bonds to finance the costs of fighting Covid-19.
But countries in Europe have no experience in using this instrument. Britain could render them a great service in this regard by issuing perpetual bonds. It would set a precedent that could be relied on by other European governments. This would help to build trust and cooperation between the UK and the EU. Above all, it would be the right way to finance Britain’s budget deficit.
Although it is generally unknown by the general public, the European Central Bank (ECB) has already introduced perpetual bonds. The ECB has purchased massive quantities of government bonds as part of its quantitative easing program. The experts know that the ECB has no choice but to own this debt in perpetuity.
Selling the accumulated bonds to the market could cause too much market turmoil – forcing governments to buy them back could never be done because it would cause unthinkable austerity. Instead, when the bonds owned by the ECB come due, they will simply be replaced with newly issued government bonds. This rollover could go on in perpetuity. That is how quantitative easing has effectively transformed fixed-maturity bonds into perpetual debt.
There is a big difference between perpetual bonds issued directly by governments and perpetual debt created by a circuitous route. If a European government issues perpetual bonds, it will lock in low-interest rates forever. If, on the other hand, the government issues new ordinary bonds to replenish the ECB’s stock of bonds coming due, it may have to pay higher interest rates.
Perpetual bonds issued directly by European governments has an important additional advantage: it is more democratic. At the moment, perpetual debt is being created by the ECB, an institution that does not respond directly to the electorate of any particular member state.
The ECB is guided by a narrow mandate – to maintain long-term price stability across the eurozone. This is not the mandate that should guide the fiscal response of European governments to the Covid-19 emergency. They have an obligation to their citizens to confront this emergency by any means necessary. This should include issuing perpetual bonds because of their innate advantages.
George Soros is chairman of Soros Fund Management and the Open Society Foundations. A pioneer of the hedge-fund industry, he is the author of ‘The Alchemy of Finance’ and ‘In Defense of Open Society’ , as well as many other books