Will Coronavirus kill the Euro?
Oliver Hartwich writes:
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. …
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. …
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.
This will be morbidly fascinating to watch. Italy is in the G7. If Italy is pushed out of the Euro, that will be massive.