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The Italian government’s decision to extend the lockdown of northern regions to the whole country raises three questions about the economic impact of the coronavirus on European economies.
1) Will it hurt the Italian economy?
In a nutshell, no. The impact of the lockdown, which bans travel and most large gatherings, is a way for the Italian government to cushion the blow from the outbreak. It has to be compared with the consequences of the government not acting now. The OECD recently downgraded its eurozone growth forecast for 2020 and expects the Italian economy to be flat this year in its central scenario. Bank of America analysts believe Italy will be in recession this year, with GDP shrinking 0.2%. But Monday’s radical decision must be interpreted as a way to fight the consequences of the virus. It will not make them worse.
2) Will France and Germany follow suit?
Even though their economies have been stronger than Italy’s for years, France and Germany may soon be forced to take similar drastic measures. The progression of the disease in these countries seems to be following the pattern it has taken in Italy, as German economist Henrik Enderlein has noted. European leaders are having a conference call today to discuss some coordination of their efforts to fight the crisis, which will unavoidably involve more public spending. But they are still at the build-up stage of preventive measures, which will include further authoritarian measures, interdictions and prohibitions.
3) Could Europe cope with a major financial crisis?
Italy is vulnerable because its economy hasn’t been growing for years, and public debt now stands at more than 135% of GDP. Bond markets have sent Italy soaring in the past three weeks, by 50 basis points, but they retreated somewhat on Tuesday, to 0.3%. Europe’s help could be twofold. First some targeted action could come from the European Central Bank on Thursday, which could design its probable liquidity injections in a way that favors Italian banks. And if the situation really turns serious, the ECB can also bail out a eurozone member state encountering temporary difficulties with its never-used “nuclear” weapon, outright monetary transactions, invented by former President Mario Draghi at the height of the euro crisis.
