The coming Covid-crisis

Oliver Hartwich, at Newsroom ($), on the consequences of Covid-19 for the Eurozone. This stuff really is Oliver's beat. 

To start with a disclaimer, I am not a medical expert. I have no degree in epidemiology, nor can I claim any expertise in public health management.

In these difficult times, it is perhaps useful to lay one’s qualifications on the table. There is too much misinformation about the medical aspects of the virus out there. Worse than that, when even the experts contradict each other, what chance would laypeople have to understand what is happening?

That said, there is one aspect of the crisis which relates to my expertise as a commentator on Europe. And that aspect, frankly, scares the hell out of me: It is what the virus does to Italy – and by proxy to the eurozone.

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When the euro crisis struck in the wake of the Global Financial Crisis, Italy was one of the hardest hit countries in Europe. Indeed, it never properly recovered from that crisis. Per capita (and in constant prices), GDP is still lower than it was in 2011. Industrial output collapsed at that time and never returned to its previous levels.

On top of the problems in Italy’s real economy, there has long been a banking crisis. It is a banking crisis that has been simmering under the surface, mainly because the European Central Bank kept it there.

For the past decade, the ECB introduced a range of programmes with the more-or-less explicit aim of stabilising the Italian banking system. Banks were enabled to access cheap, fresh money from the ECB so they could purchase Italian government bonds and pocket the interest rate difference. That way, the ECB kept both the Italian banks and the Italian government afloat. Only every now and then were these policies not enough and Italian banks had to be bailed out like Banca Monte dei Paschi or Banca Popolare di Bari.

The Italian government certainly benefited from the implicit ECB support. It is one of the most indebted governments in the world. Thanks to the ECB’s help, 10-year government bonds currently trade around 1 percent and thus much lower than a decade ago when they peaked at more than 7 percent. Even so, Italy’s debt-to-GDP ratio kept going up and has hovered around 135 percent since 2015.

Politically, it has been a turbulent time for Italy as well. After the wasted Berlusconi years, the EU interfered directly with Italian politics during the GFC and even installed a new Prime Minister by exercising pressure. Ever since, the Italian political system has been characterised by the rise of populism, both from the left and the right. Only very recently, after the exit of the Lega party from government, did the country see a return to a more moderate and conventional form of government.

So, Italy has long been a troubled place on many fronts. Even that is an understatement. We haven’t even mentioned Italy’s demography. Or migration. Or corruption.

But all that was before the coronavirus hit. And the situation now is worse. Much worse.

Despite Italy’s many, many problems, the country could always rely on its inherent appeal. There is only one David – and he stands in the Galleria dell’Accademia in Florence. There is only one Venice in the world. There is no equivalent of Rome anywhere else.

No wonder that tourism had become one of Italy’s most important industries. It was practically the only industry still growing and accounted for about one seventh of Italian GDP. Just for comparison, agriculture accounts for not even half that in New Zealand.

Tourism collapses; Italy's public finances collapse; its debt ratio jumps; the zombie firms fall over along with the banks to whom they owe money.

To say it clearly, Italy is too big to fail – in ordinary times. But it is definitely too big to be bailed out – in extraordinary times.

If Italy fails – and there is a temptation to write ‘When’ instead of ‘If’ – it will be a catastrophe not just for Italy. It will be the end of the Euro as Europe’s currency. It will be the return of the euro crisis on steroids.

I have been covering the euro crisis for a decade now for various publications. But I have never seen a situation as dramatic as Italy’s today. The only reason why you may not have read about the new coronavirus-induced Italian euro crisis just yet is that there are so many other coronavirus-induced crises around.

As for my Italian friends, I am afraid I have to finish with a quote from your national poet, Dante Alighieri: Lasciate ogni speranza voi ch′entrate. (Abandon hope, all ye who enter). This will not end well.