US, WASHINGTON (ORDO NEWS) — The coronavirus pandemic is the second major economic blow in a decade since the 2008 crisis and is subjecting the eurozone to new challenges. After realizing the magnitude of the recession, tensions arose in the markets, especially in Italy, one of the first affected countries.
The European Central Bank had a false start, but then he did everything necessary to put out the fire. In total, he will spend a little more than a trillion dollars by the end of the year.
This money will be used primarily for the purchase of bonds of the eurozone countries. In other words, the ECB takes over the debts of states, allowing them to receive emergency financing, primarily to support enterprises and people in situations of partial unemployment. So far, the plan is more or less working. The markets calmed down.
Nevertheless, rates on Italian bonds rose again by almost 2% on April 20, coming close to the “red zone”. The eurozone, in turn, was again at a crossroads, and the pandemic exacerbated underlying tensions.
On April 23, heads of state and government should discuss a potential consolidation of European debt. This could be a joint bond or a common fund, as France suggests. Unfortunately, these negotiations have poor prospects at the moment. The countries of the “north”, led by the Netherlands and Germany, do not want to “pay for others.”
From a political point of view, their arguments are absolutely understandable. Why would they issue common bonds with much less economically stable states? They would be forced to accept higher interest rates, raising the price of their own loans.
The problem is that we do not have a huge variety of ways to maintain a monetary union: there are only three of them. The first is debt consolidation, which will allow weaker countries to rely on richer ones. The second is the “rapprochement” of economies: everyone should keep track of their costs and avoid shortages, which should reduce economic tensions between countries.
An example of this method is the austerity policy that has been imposed over the past decade. She has positive aspects: for example, Italy was able to reach a budget surplus (not counting interest on debt). Nevertheless, the social price was simply enormous, and, politically, no one is now ready to announce another decade of austerity.
There remains the third path, which we, by the way, have been seeing since 2012: this is the path of the ECB. By actively buying debts, the bank was able to save the single currency, and today it holds almost a quarter of the state debts of 19 member countries.
How much longer can this go on? In theory, this poor balance is fairly stable. Expiring at the end of the year, the ECB program may be extended. Nevertheless, the main danger is that the economic crisis can develop into a political one. It is possible that the leader of the ultra-right, Matteo Salvini, will come to power in Italy. Or Marine Le Pen in France. If Germany and the Netherlands do not show solidarity, this will be an argument in favor of anti-European rhetoric. Maybe one of them will decide to exit the eurozone? In a dismal interview with the Financial Times, Emmanuel Macron sounded the alarm: “If we don’t do this (we will not combine debts, ed.) The populists will win today, tomorrow or the day after tomorrow, in Italy, Spain, maybe in France and other countries”.
It’s not too late. The storm in the markets subsided. You can make a gesture of solidarity among members of the eurozone. But the more Europeans pull, the more expensive and stronger this signal should be. And the probability of one of the members leaving will grow. If it becomes Italy, the third most important economic power of the single currency, the blow will be catastrophic.
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