Reinforcing the Eurozone and protecting an open society: Refugee bonds

Giancarlo Corsetti, Lars Feld, Ralph Koijen, Lucrezia Reichlin, Ricardo Reis, Hélène Rey, Beatrice Weder di Mauro 27 May 2016



Editors' note: This column was first posted on 4 May 2016 when the draft report was posted. It is being reposted to alert Vox readers that the final version is now available to download (free) here.

One of the major challenges facing the EU today is the large wave of refugees that have recently arrived from the Middle East and Northern Africa. This large-scale migration has in part been associated with episodes of xenophobia, the rise of populist politicians, and restrictions on the free mobility of people within Europe, which has long been one of the bedrock principles of the Union. The more important challenges that this crisis poses are probably political and humanitarian, but there are a few economic and financial measures that would certainly help. In Chapter 4 of the new Monitoring the Eurozone report, Reinforcing the Eurozone and Protecting an Open Society (Corsetti et al. 2016), we propose one such measure – ‘EU refugee bonds’.1 The proposal builds on three arguments:

  • The response to the refugee crisis is an EU-wide public good (Berger and Heinemann 2016);
  • Additional funds to finance it are necessary; and
  • Bond financing is appropriate because of the intertemporal nature of the problems.

A similar proposal, called Migration and Mobility Bonds (MMBs), has been aired by Kirkegaard and Philippon (2016). However, they do not outline in much detail how these bonds should be designed. De Geus et al. (2016) propose instead a European solidarity fund for financing the refugee crisis, thus asking for a larger scale operation than we deem necessary. The Italian government in April also proposed a form of bonds to deal with the refugee crisis, but as part of a wider compact on migration policies and with some characteristics that we do not necessarily agree with.

The refugee crisis response is an EU public good

In spite of the focus on the Syrian conflict, asylum seekers in the EU have been on the rise for several years. It comes with the EU being a safe and prosperous region of the world that refugee crises are permanent recurrent shocks. Because people can move freely within the Schengen area, and since refugees are by nature particularly mobile people, it is short-sighted to think of the current refugee crisis as a problem for the countries at the border only, or for the countries that have received the most refugees in the past few months. Sooner or later, refugees will move and they respond strongly to incentives across regions. The refugee crisis is a permanent and aggregate European problem; even if its effects accrue differentially across regions, it changes quickly over time.

Aside for being a common shock, its costs and benefits also involve a series of externalities across regions, and costs and benefits that are common. Asylum and humanitarian aid are basic human rights, and external security and free mobility of labour are almost by definition EU public goods. Moreover, the costly initial processing of refugees and the securing of borders falls on the border country, giving rise to a free rider problem where countries at the border try to divert migrants to enter through a neighbouring EU country. In turn, integrating immigrants comes with costs that are front loaded and so fall on the host country, while the benefits will accrue to the countries where those refugees eventually settle. Finally, because of the endogeneity of migratory flows to the policies adopted by different countries, some extent of coordination is needed to achieve common goals.

At the same time, the refugee crisis is probably not best handled by a uniform European policy. Europe is heterogeneous in its policies and culture so that integrating a person into a particular region requires flexibility and local knowledge that would be hard to dictate in a centralised fashion. Therefore, the public good nature of the refugee crisis makes a stronger case for a common sharing of expenses and common financing of programmes.

Funds are necessary

Current European security agencies are limited on what they can achieve by design, but also because of understaffing and underfunding. Europol has for years been diagnosed as being relatively understaffed, underfunded, and limited in what it can achieve. This is perhaps even more the case with the main European agency for border control, Frontex. Figure 1 compares the staff of Frontex (right panel) with the number of asylums seekers (left panel). In spite of the growth in the latter, staff numbers in the former were falling up until 2014. Frontex has no operational resources, so it can provide little intervention on the borders aside from information sharing.

Figure 1 Asylum applicants and Frontex staff members

Source: German Council of Economic Experts (2015) and Frontex.

Thus, there seems to be large scope for improvements in both security and integration, of which the following are the most important:

  • A legal change so that the European agencies can become active without demand of a member state as long as some narrowly defined conditions are met, such as the occurrence of a refugee crisis;
  • Integration of careers and delegation of staff from the national agencies in order to have them better integrated with the European agency;
  • Information sharing at early stages of investigations;
  • Engaging in fast operational (but not coercive) interventions; and
  • A larger budget for and staff at Europol and Frontex.

At the national level, there are many areas where current resources are stretched. Urgent humanitarian aid at the border must be mobilised in the short run and on a more consistent basis, and there is much room for improvement in national programmes for housing, transfer payments to refugees, language training, and active labour market policies. All these require extra spending. At the same time, they are all relatively small programmes so from the perspective of the EU as a whole, this would be a small effort, and all spending can be very precisely targeted to these specific expenses.

Bond financing is appropriate

Many countries in Europe are currently facing severe fiscal constraints that make it hard to raise new revenue via taxation. Tax increases by each member state would reduce much-needed economic growth and add a higher excess burden of taxation. From the perspective of tax smoothing, issuing bonds is thus desirable. At the same time, the refugee crisis involves costs now, in securing borders and integrating immigrants, and benefits in the future, when integrated new EU citizens contribute to the prosperity of the member countries. Issuing bonds therefore is the appropriate form of financing these expenses.

These are EU-wide bonds because they correspond to an EU-wide programme. They could be issued either by the European Commission, or by the European Investment Bank following the same mould as bonds issued by the EFSF. In the latter case, the bonds would be guaranteed by the member states according to fixed shares of their weight in Europe. Refugee bonds are specifically earmarked to projects in securing the borders and integrating immigrants, so that they cannot be used for other arbitrary expenses. Regions that would like to receive more of the funds would have to take on more of the projects of integrating immigrants, so that funds could quickly shift across borders and regional redistribution would not be a goal.

These are not European bonds in the sense usually proposed because they are narrow in scope, tied to projects and issued in small amounts. They are very different from the type of financial assets that we advocate for breaking the diabolic loop between banks and sovereigns in Chapter 2 of the 2nd Monitoring the Eurozone report (Corsetti et al. 2016). At the same time, they would contribute to enriching the financial architecture of the EU, and provide a learning ground for how EU-wide bonds would be traded, priced, and paid for.


EU refugee bonds are not the solution to the EU refugee crisis. They are consistent with some of the more ambitious or more moderate programmes, including a new Marshall Plan for the Middle East or payments to Turkey. What they are is an improvement in the financial architecture of the EU that would complement other measures. EU refugee bonds are a clear instance of an initiative that would solve an uncontested common problem, that is small in scope and well targeted, and which would contribute to the construction of a new financial architecture in Europe that is richer and better able to deal with shocks.


Berger, M. and F. Heinemann (2016), “Why and How There Should be More Europe in Asylum Policies”, ZEW Policy Brief No. 1, ZEW Mannheim, January.

Corsetti G., L. Feld , R. Koijen, L. Reichlin, R. Reis, H. Rey and B. Weder di Mauro (2016), Reinforcing the Eurozone and Protecting an Open Society, Monitoring the Eurozone 2, CEPR Press.

De Vries, C. and I. Hoffmann (2016), “Border Protection and Freedom of Movement: What People Expect of European Asylum and Migration Policies”, eupinions #2016/1, Bertelsmann Stiftung, Gütersloh.

German Council of Economic Experts (2015), Focus on Future Viability, Annual Economic Report, Wiesbaden, November.

Kirkegaard, J. and T. Philippon (2016), “Europe Needs Migration and Mobility Bonds”, mimeo, New York University.


[1] The 2016 Monitoring the Eurozone Report, the second in the series, discusses fiscal and financial governance in the Eurozone in its first 3 chapters. It proposes a Eurozone sovereign debt restructuring mechanism, regulatory changes to deal with sovereign exposure of banks and a mechanism to reduce the debt overhang in the short run. We summarised the first three in an earlier Vox column.



Topics:  EU policies Europe's nations and regions Migration

Tags:  Monitoring the Eurozone, refugee crisis, refugee bonds

Professor of Macroeconomics, University of Cambridge; Director, Cambridge-INET

Director, Walter Eucken Institute; and Professor of Economic Policy, University of Freiburg

Professor of Finance, London Business School

Chairman and co-founder, Now-Casting Economics; Professor of Economics, London Business School; CEPR Research Fellow; Fellow of the British Academy

A.W. Phillips Professor of Economics, LSE and CEPR Research Fellow

Lord Bagri Professor of Economics, London Business School and CEPR Research Fellow

Distinguished Fellow, Emerging Markets Institute, INSEAD Singapore and Economic Policy and International Macroeconomics Professor, Gutenberg University Mainz; CEPR Research Fellow