No European economy is coming out economically unscathed from this pandemic. Germany, Europe’s largest economy, is expected to decrease by 4.2% this year. The dire projections of economic recession throughout the Eurozone are a result of the likelihood that entire sectors of the economy will continue operating under capacity until a vaccine and treatment is developed and widely distributed.
The v-shaped recovery that had been discussed as social distancing measures were first implemented no longer seems to be viable. The eurozone economy is projected to contract by 7.7% according to the European Commission’s forecasts reported in the Wall Street Journal. Seven Eurozone economies are expected to have debts that exceed 100% of their GDP by the end of 2020. Not all economies will recover as quickly from this pandemic, particularly with the potential for mass reclosing of the economy if infections spread quickly soon after reopening.
“It is now quite clear that the EU has entered the deepest economic recession in its history,” said Paolo Gentiloni, the European economy commissioner.
Italy’s economy has been one of the hardest hit European economies and is projected by the International Monetary Fund to shrink by almost 10% this year, according to the Bulwark. The economic distress caused by the coronavirus pandemic will force the Italian government to borrow substantially. As a result the Italian government’s deficit is expected to increase to 8.5% of the country’s GDP and Italy’s public-debt-to-GDP ratio could reach 160% this year.
Italy’s economy has been categorized as too big to fail, however any bailout to the Italian economy is sure to be coupled with strict austerity measures. However, the approach to bailing out economies during this pandemic might be different, given the relaxation of EU limits on member countries’ budget deficits, according to CNN.
The current approach to supporting struggling economies is to provide bonds from the European Stability Mechanism. The bond would have to be repaid only by the government it was lent to. Such an approach requires that government spending be focused on repaying debt after a crisis instead of investing financial resources into the country’s economy.
“The ESM is a tool created to help single member states that face financial problems caused by asymmetric shocks,” Giuseppe Conte, Italian Prime Minister, said. “Just when the Italian government would need the money most is when the markets would punish the Italian government.”
There has been discussion of countries in the Eurozone jointly taking on debt, according to Fast Company. Colloquially known as the “coronabond,” the shared debt instrument would provide a way for countries to each take on a portion of the financial burden caused by the coronavirus pandemic.
This approach ensures that the most disproportionately affected economies are able to make a quicker recovery, by not being solely saddled with overwhelming sovereign debt. Italy, Spain, France, Belgium, Luxembourg, Portugal, Greece, Cyprus, Ireland and Slovenia have all expressed support for this approach. However, the Netherlands, Austria, Finland and Germany have all rejected the idea.