Will the eurozone survive Covid-19? If it does, it will be for the same two reasons it survived the financial crisis: fear of a ruinous break-up and action by the one institution able to do so on the scale needed. In July 2012, Mario Draghi told an audience in London: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” The ECB is saying this now. It should be enough.
The pandemic is creating an enormous common shock. But it has asymmetric results. Among larger member countries, the brunt of the disease has fallen on Italy and Spain, although France has been catching up. According to the IMF, the eurozone’s gross domestic product will shrink by 7.5 per cent this year; Germany’s GDP will fall 7 per cent, but Italy’s by 9.1 per cent. Its Fiscal Monitor forecasts the eurozone fiscal deficit at 7.5 per cent, Germany’s at 5.5 per cent and Italy’s at 8.3 per cent.
Alas, even this looks optimistic. The “baseline” projection of the IMF’s World Economic Outlook assumes that shutdowns will end in the second quarter of 2020. But it is quite likely that they will not, or that they will need to be repeated. In the baseline scenario, the GDP of high-income countries shrinks by 2 per cent between 2019 and 2021. In the worst alternative — a lengthier shutdown now, followed by another in 2021 — GDP would be almost 10 per cent lower in 2021 than in 2019. Yet, even on its baseline view, the IMF forecasts Italy’s gross public debt at 156 per cent of GDP this year, up from 135 per cent last year. Debt is set to become mountainous for several eurozone members in the years ahead.