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Apart from the threat to human life, Italy may be exposed more than other countries to what are likely to be the pandemic’s severe economic consequences. The potential repercussions for the eurozone, and the EU as a whole, can hardly be exaggerated.
The pandemic is already a test case of Europe’s unity and political will, and it could get a lot worse. Without resolute, co-ordinated action from all EU governments and institutions that go beyond the market stabilisation and liquidity measures announced on Thursday by the European Central Bank, the survival of Europe’s monetary union may be at risk for the second time in a decade.
Among the eurozone’s 19 members, Italy stands out as the one that never fully recovered from the sovereign debt and bank crises that swept across the currency union after 2010. Italy’s manufacturing sector shrank by a quarter in that crisis. Many of its banks, loaded with government debt, remain fragile.
The roots of these weaknesses go deeper. During the 20 years of the euro’s existence, Italy has recorded next to no economic growth. Low labour productivity, an inadequate education system, an inefficient judiciary, corruption and organised crime are problems with a long history. Since the late-20th century Italy’s public debt has been worryingly high. But whereas before the 2010 crisis it amounted to a little over 100 per cent of gross domestic product, now it is approaching 135 per cent of GDP.
From a public health point of view, Italy’s emergency measures are essential. But they carry risks for the multitude of small, family-run businesses that depend on daily contact with customers and cash transactions that are drying up. Giuseppe Conte, Italy’s prime minister, said on Wednesday that the government was setting aside €25bn, or about 1.4 per cent of GDP, to protect the economy against these threats.
However, prominent economists such as Lorenzo Codogno, a former director-general of Italy’s Treasury, and Ashoka Mody, a Princeton University professor, doubt that this will be enough. They think the risks from the pandemic are so high that Italy, the eurozone’s third-largest economy, should request immediate financial assistance from the eurozone bailout fund and maybe the IMF.
Uppermost in everyone’s mind is the thought that, if Italy were to need help, the cost might run to hundreds of billions of euros. Almost certainly it would be no straightforward matter to win the approval of other European governments, divided as they are over eurozone reform, refugee policies and other issues touching on national sovereignty. [...]
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