In my last post I looked at the end of the coronavirus and how the world will react in the light of China’s lies, threats and risky behaviour which has left so many people dead around the world and so much of the world’s economy in free-fall.
Today I want to briefly discuss another impact of the coronavirus – the impact it will have upon the EU. Already there has been tension within the Union, with some high-ranking Italians complaining about (and resigning over) the lack of solidarity other members showed towards hard-hit Italy and Spain.
Although EU members have recently agreed to a €500 billion credit line (without oversight from richer, largely creditor Northern members) there is a real concern that the extended shut down of Europe’s, and the rest of the world’s, economy will leave lasting damage to the Eurozone. Will this damage be permanent and terminal though? Andrew Stuttaford over at National Review has a great review of the internal contradictions and weaknesses of the Eurozone and how these will be exacerbated by the coronavirus response by its governments.
The trouble lies in the Euro’s genesis: it is a currency union without corresponding fiscal union between the Eurozone’s countries. There was not enough political support for such a fiscal union in the European countries, although there was in the halls of Brussels.
But there was little interest in pooling financial risk with fellow member-states who were not trusted to run their own affairs responsibly. Why should Dutch or German taxpayers bail out Greeks and Italians? One such reason may have been because German taxpayers and exporters at least got an artificially devalued currency, but anyway…
When the Euro-crisis broke out about a decade ago, these tensions between the euro zone’s north and south came to the surface with a vengeance. Stories of profligate southerners abounded (I particularly liked the one about the Greek island where every one of its 200-odd inhabitants were blind, including the bus driver, so that they could claim the disability allowance).
At the same time the feeling that countries, particularly Greece, were in thrall to an unfeeling and uncaring Fourth Reich which had no idea of the economic devastation that was hitting the south of the continent, flourished.
The subsequent bailouts strengthened suspicions in the north of any sort of fiscal union except on terms that would be extremely unpalatable to those in the south. Germany and other countries have continued to reject the concept of “Eurobonds” – bonds guaranteed by all Eurozone members.
Then came the current crisis which has hit Italy and Spain (two of Europe’s weaker economies) particularly hard.
Before it, Italy’s GDP per capita was roughly at 2009 levels, still far below its 2002 figure. The government indebtedness was around 135 percent of GDP and there was no way for the government to devalue its way out of difficulty. This economic malaise played its (large?) part in the rise of the less mainstream parties in Italy as well as in Eurosceptism. Now most of the country’s economy has been shut down and its next GDP figures will be well into negative territory.
The trouble for the rest of the Eurozone is that Italy is far bigger than Greece, so the script of the last Eurozone crisis cannot be followed. As Stuttaford says, Italy is both too big to fail and too big to bail out. However, to predict that this will trigger the end of the Eurozone is risky, and quite frankly there have been enough bogus predictions during this crisis.
It will not be surprising if the Eurozone countries will find a way to muddle through since the economic dislocation of a breakup is not something to be entered into lightly. “And always keep a hold of nurse for fear of something worse,” as Hilaire Belloc wrote.