The Economic Consequences of the Pandemic in the Eurozone

From an economic point of view, crises may have different origins but have a common consequence: a dramatic drop in employment. The intensity of the crisis can be measured, in fact, by taking the level of unemployment as an evaluation measure.

In the United States, unemployment reached 15 percent of the workforce after the onset of coronavirus disease. It is the highest level in American history since the Great Depression of the early 1930s. It is no coincidence that we see the government intervening with extraordinary measures. Trump proposed an intervention of a trillion dollars of additional public expenditure. But the Democratic Party has imposed an intervention that exceeds two thousand billion, touching more than 10 percent of the national income

The Japanese government has not been outdone by decreeing an extraordinary public expense of one trillion dollars, 20 percent of the national income, to face the consequences of the coronavirus disease.

By comparison,  division and escape from any collective responsibility prevail  in the euro area. The horizon is limited to the coming months, not to the long-term economic consequences of the pandemic that has already caused an unprecedented collapse of national income, the closure of medium and small businesses that are unlikely to reopen, the disaster of the weaker regions, and unemployment levels without precedents.

The political and journalistic debate in Italy on the use of the   European Stability Mechanism (ESM) - which is inexplicably called "Save State"-  is humiliating. The resources potentially available are calculated in 2 pe cent of GDP, or about 35 billion. An amount that is not only incomparable with the previous mentioned economic interventions, but which can’t be freely used. The borrowed resources – it is not a grant – should be used only in the health care  sector limited to the pandemic disease.

A sort of provocation given that the Italian government has already established an additional expenditure of over three billion in the sector for the immediate needs related to the expansion of medical and nursing staff as well as for the strengthening of the equipment concerning the treatment  of the pandemic.

On the other side, taking into account the Chine’s experience and according to  current scientific forecasts, the coronavirus disease should  reduce its impact with the advent f the new hot season. And in any case, the economic consequences of the pandemic cannot be reduced to the costs of coronavirus treatment, since the entire economic system is in crisis like never before.

As we have seen, the crisis calls for actions of quite different dimensions. Compared to the United States or Japan, to return to the previous examples, Italy should plan direct public interventions as well as in support of private enterprises in the order of at least 300 billion euro. The possible fields of intervention are innumerable. Starting from the degradation of public schools, especially in urban suburbs, abandoned for several decades, where millions of children, teachers and auxiliary staff meet. As well as the transport network, such as roads and railways, especially in the south. And, more generally, the degraded suburbs of big cities, particularly in the Mezzogiorno, just to give some examples of backwardness of public infrastructures.

Salini, leader of one of the most important construction enterprises in the world, which is completing the construction of the Genoa bridge in an exceptionally short time, said that it is possible to design and build public works deemed necessary for a value of one hundred billion. Another example of a possible network of public investment that mobilizes large and small companies together with a significant mass of employment.

What are the obstacles to establish a vast program of  public investment?
 We must remember that the policy adopted in the euro area over the past decade has been dominated by a deflationary approach. Growth in the euro area was the lowest among developed countries worldwide. In the past two years not only Italy, but also Germany has experienced almost zero growth marked by intermittent phases of recession. The worst record among industrialized countries globally.

In a normal country, the necessary financial resources have two related sources. The expansion of public budget expenditure and a massive supply of liquidity from the central bank. But in the euro area it cannot be done for two reasons. The first derives from the constraints imposed on public spending: regardless of the economic trends and the changing economic situation, the budget is tied to the zeroing of deficit as established by the Maastricht Treaty almost 30 years ago.

And  public debt must always be falling until it reaches the abstract and arbitrary threshold of 60 percent of GDP - an objective, in any case, that is unattainable without having first achieved a strong growth of national income which can lead to the relative reduction of debt.In effect the two parameters on deficit and debt imposed  in the Maastricht Treaty almost thirty years ago by Germany, ideologically linked to rigorous parameters of public finance, remembering the catastrophic collapse of the German Mark in 1923.

Adding salt to the wound, the German Constitutional Court has declared that the government and Parliament must block, in the course of three months, the purchase of public securities that the European central bank acquires, beyond the limits established by the principles of economic  and fiscal policy of the Eurozone. Christine Lagarde, President of the European Central Bank, replied that the ECB is required to respect the rules of the EU Court of Justice and not the statements of the Constitutional Court of a member state.

In any case, it is difficult, if not impossible, for the ECB to operate in a context of conflict with the Bundesbank led by Jans Weidmann, now a member of the ECB's governing bod,y after having been candidate for its Presidency, before the Merkel - Macron compromise with the appointment of  Christine Lagarde. A compromise followed by the election of Ursula von der Leyen to the presidency of the European Commission, blatantly reinforcing the Franco-German couple at the head of the two highest institutions of the eurozone.

All this has a sour taste of complicated technicalities, but in simple terms it is a rope around the neck of the Member States particularly affected by the crisis. In the end, the freezing of public investment paralyzes growth. And the lack of growth increases the public debt due to the payment of interests

According to the current forecasts of the IMF, the three largest eurozone countries - Germany, France and Italy - will experience a fall in national income between 6 and 10 percent respectively in the first year of the crisis. This will increase the public debt as percent of the GDP, blocking  any chance of its reduction, to not say reimbursement, in the framework of recession and stagnation.

The Italian situation is made particularly difficult by the fact that the debt proceeds towards 160 percent of the national income, the highest in the European Union after Greece, and the third highest in the world, including Japan which, however, has the invaluable advantage of paying rates close to zero on the total amount of the debt.

In other words, public debt, regardless of its  dimension, can be gradually repaid only by virtue of sustained and lasting growth promoted by a substantial public intervention aimed at recreating the conditions of growth.  If, instead,  growth is substantially blocked due to the lack or insufficiency of public investment, the way is opened to a sheer or masked default as has been the case in many eurozone’s member states after the 2008-11 worldwide financial crisis.

The corona virus crisis has disruptive economic effects, the consequences of which we can only roughly appreciate. A profound change in euro area policy is now necessary. And it would be possible. But for now there are no traces of it.

 The future, according to the ancient Homeric maxim, rests on the knees of the gods. But the judgment on the past, although almost always historically controversial, in the case of the eurozone is unequivocal. The experience of the last decade can be called a failure. And the risk of disintegrating the eurozone remains a fact without a strong reversal of the bankruptcy policies practiced in the last decade.