The euro area
Cut to the chase
Look out for a panic about the single currency. If it cannot integrate further it will break up
The euro area is set for its deepest downturn and its sternest economic test yet. Some forecasters expect GDP to shrink by nearly a tenth in 2020. But as history is being made, it is also being repeated. Talks between Europe’s politicians about the covid-19 crisis have descended into yet another ugly row over which countries gain and lose from a common currency. The acrimony has its roots in Europe’s sovereign-debt crisis in 2010-12, when stricken southerners pleaded for solidarity and northerners refused to bail out what they saw as bad behaviour.
Back then the euro area avoided collapse largely thanks to action by the European Central Bank (ECB). The euro zone has since had a chance to pass deep reforms in order to deal with its fragility once and for all, but the time was ill-used. Having given up their monetary independence long ago and failed to cut public debt, some countries cannot deal with the crisis on their own. They need help from stronger economies in the north.
To avoid a deep and enduring slump, the southern countries need government spending that will shore up their economies today and relaunch them when the pandemic has abated. Yet this spending will sharply increase their debts. In Italy public borrowings are already worth 135% of GDP, and that figure could easily rise to well over 150% with even a modest stimulus. If its government spends freely, investors could panic about an eventual default or debt restructuring. Greece, Spain— and even France—face the same hard choices.
The temptation is to dither. Southern borrowing costs are higher than the north’s but not near panic levels. Italy’s ten-year bonds yield about two percentage points more than Germany’s. After fumbling, the ECB has tried to limit the damage by acquiring bonds and relaxing rules about what it buys.