April 22, 2020 - 4:31pm

George Soros argues that the EU needs a trillion euro Recovery Fund

On Monday, I argued that governments are poised to finance the enormous debts they’re racking up by monetising them. Central banks will create money out of nothing and use it to buy up bonds issued by their respective governments. One part of the state will therefore borrow made-up money from another part.

If you think that sounds sounds far-fetched then read this piece for Project Syndicate by George Soros. The financier and philanthropist argues that the EU needs a trillion euro Recovery Fund. The really interesting bit, however, is his idea for raising the money — namely, through a loan that’s deliberately designed never to be paid back:

I propose that the European Union should raise the money needed for the Recovery Fund by selling “perpetual bonds,” on which the principal does not have to be repaid (although they can be repurchased or redeemed at the issuer’s discretion). Authorizing this issue should be the first priority for the forthcoming European Council summit on April 23.
- George Soros, Project Syndicate

Almost all bonds have a maturity date — a specified point in the future at which the bond issuer (i.e. the borrower) repays the bond purchaser (i.e. the lender). A perpetual bond, however, has no maturity date. Beyond the payment of interest on the amount borrowed, there is no obligation on the issuer to repay the loan itself.

As Soros points out, there’s nothing new about this idea — the British government first issued perpetual bonds known as Consols in 1751.

But would today’s investors be interested in a trillion euros-worth of EU perpetual bonds — especially if the ‘coupon’ (i.e. the annual interest payable) is very low? Possibly not, but Soros has a specific buyer in mind — one with very deep pockets: ‘…an EU-issued perpetual bond would be a very attractive asset for the ECB’s bond-purchase programs.’

I’m presuming this refers to the European Central Bank’s various doses of quantitative easing — i.e. the use of newly created money (in this case, euros) to purchase government debt and other financial assets with the aim of reducing borrowing costs.

To have the ECB buy up perpetual bonds, however, goes well beyond normal QE. In fact, QE plus perpetual bonds pretty much equals money creation to directly finance government spending.

But so what? These are exceptional circumstances, aren’t they? If the Soros scheme is what it takes to bail out the Italians etc. and save the EU, then so be it. The fact that perpetual bonds don’t have to be paid back might even persuade the Germans etc. to agree.

Except for one little problem: Using the ECB’s metaphorical printing press to finance public spending (whether at a EU, national or local level) seems to be illegal under article 123 of the Treaty on the Functioning of the European Union.

It would be ironic if the EU stopped functioning as a result.

Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.