It has not escaped the attention of many economists that, in Europe, the hardest blows of the coronavirus pandemic are falling upon already debt-riddled Mediterranean countries.
Soaring infection and mortality rates in Italy, Spain, and France have led to the first stringent lockdowns on the continent in the wake of a virus where days, even hours, might save lives but will clock up painful economic consequences.
The strident steps taken to contain the spread of infection will inevitably lead to a painful recession and contribute eye-wateringly to already sizable budget deficits. While in the United Kingdom, the 350-billion-pound lifeline announced by the chancellor will see the country borrow at levels never before witnessed in peacetime, for Italy and Spain, such borrowing is simply unimaginable.
Naturally, prospective lending to unsound economies means higher interest rates creating prolonged economic crises — if borrowing can be undertaken at all. At the end of last year, Italian debt was already 136.2% of the country’s gross domestic product, with France and Spain not far behind. Despite sharing a currency, other members of the eurozone are not forced to borrow at the same rates. Markets anticipate solvability and liquidity and attach conversion risks on the premise of each country reverting to a domestic currency. The premium risk currently sits at -0.4% for Germany based on borrowing for 10 years, but for France, it’s 0.5%. Spain is at 0.7%, and Italy’s is 1.5%.
Anticipating disaster, the European Central Bank has already announced its intention to counter catastrophic fallout through a European Pandemic Purchasing Programme. This quantitative easing by any other name of 750 billion euros would come without caps on sovereign bonds bought up by central banks. The idea is to prevent huge rate differences between euro countries.
Buying on the secondary market to sidestep direct financing is purchasing an obligation, triggering price rises but lowering interest. Yet such moves are unlikely to be enough. Both bonds and stock markets are not responding to such measures, facing a never-before-seen crisis where demand and purchases have all but ground to a halt.
This sudden brake on movement could amount to at least an extra 10% deficit for affected countries and -7% growth. In Italy, this would translate to a debt-GDP ratio of more than 150% by the end of 2020.
The Mediterranean countries are painfully aware of the financial peril to come and have asked the European Union to set up “coronabonds” to mutualize debt through bonds for the entire eurozone, not by country. But Germany, the Netherlands, and Finland have rejected the concept despite potentially being able to benefit from an undervalued currency in the wake of the crisis.
Without agreeing to stabilize debt across the eurozone, an alternative solution would be to undertake massive transfers of debt within the EU budget. But due to France and Italy being net contributors and the gaping hole left by the U.K. contribution, this would require Germany, the Netherlands, and Finland to foot an enormous proportion of the bill. Politically, this is unlikely to fly.
Instead, the richer nations have proposed deploying the European Stability Mechanism, guaranteeing access to cheaper loans. But this comes with grotesque conditions that wreak lasting destruction on the economy — just ask Greece.
Article 12 of the European Stability Mechanism demands almost full control of economic and social policy. Germany took over the Greek economy, imposing punitive austerity that saw the nation’s GDP shrink by 25% in a decade while up to 40% was stripped from pension payouts. One-third of the population lives in poverty, struggling to get by on $340 a month. The tragic human consequence of excruciating austerity has been a spike in suicides of 45%.
Unsurprisingly, Italy does not want to accept the European Stability Mechanism, but it is increasingly inconceivable that it can finance itself. That leaves one option: returning to the lira to finance debt through the Italian Central Bank.
If Italy does leave the euro, as the third-largest economy in the group, it would gut the currency. Spain, Italy’s closest direct competitor, would be forced to follow after a massive resultant shock.
Yet even if Germany did permit nonconditional application of the stability mechanism, or a mutual bond program, it may be too little, too late.
Something else is spreading virally across Europe. Anti-EU sentiment is surging in Italy, and Prime Minister Giuseppe Conte warned Brussels that if it mismanages this crisis, the EU will lose its entire reason for existing.
The scale of the nightmarish economic consequences of the coronavirus is yet to be seen. But what has been exposed is that when it comes to a crisis, it’s each for its own among EU nations. The eurozone, and perhaps the EU itself, could be one of COVID-19’s victims.
Alexandra Phillips was a Brexit Party Member of the European Parliament for southeast England until the United Kingdom left the EU. She previously served as chief press secretary to Nigel Farage, the leader of the Brexit Party. Charles-Henri Gallois is the Economics Spokesman for Union Populaire Républicaine, a French political party that advocates for France to leave the EU.
