March 20, 2020
Eurozone faces second major crisis
The eurozone faces its second crisis in a decade, but this time the starting fiscal and monetary positions are far worse than in 2010. There is once again a real risk that the eurozone might blow up, warns Les Échos. That old discussion is now back on the agenda. We already see disagreements within the eurogroup and the ECB council. Debt and deficit ratios have diverged since 2010 and are expected to diverge even further over the coming months. It is not far fetched to see a scenario where public debt could rise by 50% of GDP. Some member states have the capacity to tap the markets at low rates, while others will see their risk premiums rise. Will the ECB do whatever it takes this time?
The capacity of member states for joint action will be tested. Not only is their fiscal space different, there is also a time inconsistency among member states when it comes to decision-making over how to battle the spread of the virus. Italy has no time to wait while Germany is slowly preparing. Member states also seem to have different mortality rates. Their responses thus reveal different political choices at any given point in time.
How can a common eurozone response be formulated if everyone is at a different point on the curve? This can only happen if those member countries where the cases and deaths are still lower step in, and refrain from thinking that they could be better off than the others. Otherwise, we see the same prejudices emerging as ten years ago: north versus south, creditors versus debtors. It will be a feast for populists.
The eurogroup has already experienced its first round of divisions. The idea of a common corona-bond to help member states fight the crisis was immediately rejected by Mark Rutte. Angela Merkel gave her usual ambiguous response, welcoming it as an interesting idea while leaving it to other member states to block it in the end. The eurozone crisis is back. This time it could be fatal.