MILAN (Reuters Breakingviews) - The European Union is in danger of turning a health crisis into a prolonged economic disaster. EU leaders on Thursday failed to agree on a joint fiscal response to the Covid-19 pandemic ravaging the continent. Despite bolder European Central Bank support, inaction by European governments will make it harder for Italy and other indebted euro zone nations to ramp up spending to support their stricken economies.
The novel coronavirus crisis has reopened old euro zone divisions. The leaders of nine nations including Italy, France and Spain have called for a joint debt instrument to help face a crisis that Goldman Sachs economists estimate may shrink the euro zone economy by 9% this year. Together, they represent nearly 60% of the single currency bloc’s gross domestic product. But the likes of Germany and the Netherlands oppose the idea. They would prefer struggling countries to individually apply for emergency credit lines offered, with conditions, by existing bailout funds.
Opponents of joint EU fiscal intervention point out that the ECB has already boosted its bond-buying programme to a chunky 1.1 trillion euros - and could go higher. That should make it more feasible for nations to sustain higher debts.
But some cracks are appearing. Greece on Friday scrapped plans to issue bonds later this year because of coronavirus. The spread between Italy’s 10-year government debt and its German equivalent, which narrowed following the ECB’s intervention, widened after the inconclusive EU summit.
European countries need the confidence to boost spending on the health system and pay for support to workers and companies. As former ECB chief Mario Draghi argues, there should be no restraint in acting speedily to open public purses. Yet the risk is that Italy, with public debt at 135% of GDP, will feel hindered. Rome has so far only approved 25 billion euros of extra spending for its worst crisis since World War Two. That’s 1.4% of Italy’s annual economic output. By contrast, Germany may borrow 10%.
If the euro zone does not show greater solidarity, some member states may be unable to prevent a depression. The economic and political costs of that failure will be vast.
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