The Global Financial Crash in 2008 brought several EU countries close to the brink of default. Pre-existing structures were not sufficient to avoid the crisis, but lessons were learnt and new regulation was put in place to stop this happening in the future. This crisis was described as a ‘once in a lifetime systemic crisis’.

However, just over a decade later, the world has found itself in yet another systemic crisis – The Great Lockdown Crisis of 2020. The COVID-19 pandemic, and the necessary restrictions and regulations brought in around the world to curb the spread of the virus, has resulted in a global economic crisis. The difference this time is that it’s also a public health crisis.

Due to the impact on public health, the magnitude of this crisis is greater than that of the financial crash and the eurozone sovereign crisis that followed. Similar to what happened during the financial crash, the current EU systems in place for dealing with the COVID-19 pandemic have either not been strong enough or have not worked efficiently.

Despite recent viral epidemics in Africa and Asia representing strong early warning signs of potential future dangers related to disease, COVID-19 still caught EU institutions and member states off guard, along with the entire world. Leaders were aware of the potential risk of global disease epidemics, yet the current pandemic has still resulted in one of the biggest economic, social and financial crises since the start of the 20th century.

Although we do not know when the next health crisis will strike, history and past experience teaches us that COVID-19 is unlikely to be the last. The changing climate, the emergence of new pathogens and the re-emergence of others poses significant risks to the health security of the EU. Alongside this, there are also chemical, radiological and nuclear risks to be considered; risks that all require a similar response. Therefore, a key lesson that needs to be learnt from the Great Lockdown Crisis of 2020 is the need for deeper union across the European healthcare sector to combat these health risks.

The ongoing and unprecedented public health crisis caused by COVID-19 has overstretched the structures and mechanisms of the European Union, especially those that deal with emergencies. In order to be ready for the next public health emergency, the EU needs effective and unified health emergency response arrangements. This also requires collaboration between member states, instead of the individual, country-specific approaches demonstrated during the current pandemic across all 27 member states. Ultimately, the EU needs a significant financial cushion for rapid and predictably increasing funding.

To ensure that a collaborative response is not only possible, but also affordable and realistic for all EU member states, we need to look towards financial innovation. Alongside colleagues from Vlerick Business School, Professor Simon Ashby and Doctoral Researcher Dimitrios Kolokas, I propose the creation of the Emergency Health Financing Facility (EHFF).

This Facility complements and integrates some of the existing structures in the EU, such as the rescEU and the Emergency Support Instrument, without compromising the EU budget or the public finances of member states. It also adds a new layer of financial innovation: securitising health emergency risks in the form of fixed income securities that are sold to institutional investors. The Facility follows the growth of market-based risk financing facilities across global and regional initiatives, led by the World Bank.

The EHFF finances can be used for a number of provisions, including medical supplies, testing kits, building infrastructures and sudden increases of personnel. This is vital in responding to future crises as we have seen the difficulties EU healthcare systems have experienced in attempting to obtain enough medical supplies, such as PPE and sufficient testing kits, which are integral to combatting the spread of the virus. The EHFF will also enhance cooperation and solidarity within the EU which is essential to overcome the effects of a systemic health emergency, without increasing the burden on member state finances. This is important as they are going to be under serious strain for many years to come.

Specifically, the EHFF is a health risk management tool that provides liquidity when it is most needed, without allocating large amounts of cash in advance. It will have positive spill overs on the public finances of EU countries as member states will be better off as part of the EHFF, rather than attempting to manage the risk of a public health emergency on their own.

The EHFF is also a cost-effective solution that protects national budgets from the impacts of health emergencies and allows all member states to have access to sufficient funding to tackle future crises, without burdening public finances.

Similar facilities already exist or are being considered in other parts of the world. The most prominent of these are:
• The Pandemic Emergency Facility of the World Bank which was designed to provide additional financing for the world’s poorest countries
• The ASEAN+3 Disaster Risk Insurance Facility
• The Pacific Alliance Catastrophe Bonds which provides earthquake coverage to four countries in South America.
These facilities tackle crises in a cross-country-wide approach, and the EU can emulate these so it can protect its own member states efficiently and fairly.

The securitisation of risk dates back to the early 20th century, when those in the insurance industry were pioneers due to the hurricanes in the Caribbean. Securities that result from risk securitisation are known as Insurance Linked Securities, or ILS, the market of which has increased steadily since the mid-90s. The most predominant form of ILS are catastrophe bonds with the main risks covered including natural disasters, such as named storms and earthquakes. However, they also cover mortgage, operational and mortality risks, among others.

Securitising the potential risks of another public health crisis, or even chemical, radiological and nuclear risks, is certainly not unheard of. The EU prides itself on collaboration, fairness and partnership and this must be reflected in the response to future crises: a joint EHFF is exactly the way to do so. Due to its financial innovation, not only does it strengthen the European Union further, therefore improving response, but it also comes at no financial burden to the fiscal budget of any EU member states.

David Veredas is a Professor of Financial Markets at Vlerick Business School, an elected member of the European Show Financial Regulatory Committee and a member of the financial committee of the King Baudouin Foundation