Coronavirus could create a huge debt crisis in the EU

US, WASHINGTON (ORDO NEWS) — In 2012, at the height of Italy’s sovereign debt crisis, Mario Draghi saved the euro by saying that the European Central Bank (ECB) would do everything possible to save the euro.

Today, when Italy is at the epicenter of the coronavirus pandemic, the strength of the euro will again be tested by the full-blown Italian sovereign debt crisis. It can be assumed that for the sake of the Italian and world economies and despite the high financial costs, Europe will have the political will to do everything possible to save the euro, American Enterprise Institute analyst Desmond Lachman writes in The National Interest.

Why is Italy facing another sovereign debt crisis? The fact is that even before the start of the COVID-19 epidemic, its economy was weak, and public finances and the banking system were in serious condition.

After an almost complete lack of growth over the past decade, the Italian economy re-entered the recession at the end of 2019. Moreover, the ratio of government debt to GDP reached 135% (which is more than in 2012), and a large volume of non-performing loans and government bonds have accumulated on the balance of Italian banks.

There is no doubt that coronavirus will cause serious damage to both public finances and the Italian banking system. The country will plunge into the largest economic crisis in all the post-war period. This in turn will lead to an increase in the budget deficit and a sharp increase in non-performing loans in the banking system, as households and companies will file for bankruptcy in large quantities.

At the epicenter of the coronavirus pandemic, Italy’s economy will be one of the worst affected in Europe. We should not forget that the whole country was forced to close for a long period, and the tourism sector, which accounts for about 7% of the economy, was completely paralyzed.

Meanwhile, due to the strict rules of the eurozone, Rome can do little in its monetary or fiscal policy. Most likely, the Italian economy will shrink by at least 10% in 2020, which will inevitably raise questions about the sustainability of its public finances and the health of the banking system.

In 2012, the legendary statement of Mario Draghi (“no matter what it costs”) saved the euro, and the ECB did not need to allocate any money to Italy, as investors took Draghi’s word.

Today, against the backdrop of an extremely unstable international financial market and the expected significant deterioration in Italy’s economic and financial situation, it is unlikely that the ECB’s statement “whatever the cost” will work. Gigantic funds will need to be allocated to European partners to demonstrate their commitment to keep Italy in the eurozone.

In order to estimate the amount of government money that may be needed to support Italy, it should be remembered that over the past decade, it took about $ 300 billion to keep Greece in euros. Given that the Italian economy is about ten times larger than the Greek, it can be assumed that Italy will need about $ 3 trillion.

In the past, Germany, the main supervisor of the eurozone, was extremely reluctant to allocate any money for such needs. One can only hope that Berlin, together with other Northern European partners, will agree to provide Rome with more generous financial support than it has been so far. If not, the global economy should prepare for Italy’s destructive exit from the eurozone.

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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.