What effect will the health emergency have on Europe’s monetary union?by Paul Wallace / March 27, 2020 / Leave a comment
The coronavirus pandemic is a lethal stress test for more than health services, ruthlessly exposing economic vulnerabilities as well. No surprise then that in Europe, now the epicentre of the global epidemic, the still fragile currency union at its core has been under renewed pressure. But is Europe ready to do “whatever it takes” again to ensure that the euro survives its latest ordeal?
A striking feature of the pandemic is that the two countries worst affected are currently Italy and Spain, which lead a grisly global league table for the death toll, exceeding even the number in China. The Johns Hopkins University coronavirus website showed today* 8,215 deaths in Italy and 4,858 in Spain, together making up just over half the total worldwide. That contrasted with 304 in Germany, the most populous country in Europe.
The health divide between southern and northern Europe now overlays the economic rift that opened up ten years ago in the euro crisis. The accompanying new economic shock is especially unbearable in Italy and Spain because they had such a tough time then (and before that in the financial crisis of 2008). Italy’s plight is acute because unlike Spain its subsequent recovery has been sluggish, leaving its economy in 2019 still 4 per cent smaller than in 2007. Spain’s GDP was 6.5 per cent up on its pre-crisis peak (in 2008), but that was still much less than Germany’s 14.5 per cent growth over the same period.
The new economic crisis unleashed by the pandemic has called into question again whether European leaders, led by Angela Merkel because of Germany’s economic and fiscal clout, went far enough in tackling the euro crisis. This was eventually resolved through three main reforms. First, the northern members reluctantly agreed to bail out four beleaguered economies in southern Europe (and Ireland as well) whose governments could no longer finance themselves in the markets. They formalised that support, which came with stern conditions for the borrowing countries to put their economic and fiscal houses in order, by setting up a permanent rescue fund, the European Stability Mechanism (ESM).
Second, in order to break the “doom loop” between rickety banks and shaky states in vulnerable economies, the eurozone embarked upon a banking union (still incomplete). The European Central Bank…