Saturday, May 2, 2020

The European Crackup

How bad is the European economy these days? Very bad.
From the Wall Street Journal:
"The eurozone’s gross domestic product fell 3.8% versus the final three months of 2019, according to data released Thursday, as measures imposed to limit the pandemic’s spread stalled everything from schools to factories to churches.
The economy shrank by 14.4% on an annual basis, far exceeding the 4.8% contraction in the U.S. economy over the same period. That largely reflects Europe’s earlier and broader lockdown.
“The euro area is facing an economic contraction of a magnitude and speed that are unprecedented in peacetime,” European Central Bank President Christine Lagarde said Thursday. “Measures to contain the spread of the coronavirus have largely halted economic activity.”
Can they get out of this mess? The underlying contradictions of the Eurozone aren't going to help. Ashoka Mody, author of EuroTragedy, the single best book on the history and nature of the :Eurozone crisis, runs down the dire situation in an excellent article on "Europe's Moment of Truth". He concludes:
"The ECB has given itself the authority to buy bonds of up to about €1 trillion. That sum seems large by euro-zone standards, but is trivial compared to the range and size of the Fed’s coronavirus-related measures. The basic difference is that the ECB has no fiscal counterpart. The ECB already owns 23 percent of Italian government bonds. If it were to cover Italy’s financing needs this year, it would end up owning over 40 percent of Italian government debt. If the Italian government then failed to service the debt held by the ECB, German and other taxpayers would — without their consent — need to replenish the ECB’s capital and effectively foot the bill for Italy.
By not dealing with the mess now, the euro-zone will find itself dealing with an even larger mess later. The ECB cannot solve the euro zone’s fundamental flaw. It is a central bank without a fiscal union — a confederation of states that may have reached the limits of confederation acceptable to the voters of many of its member states.
When I concluded the hardcover edition of my book EuroTragedy two years ago, I offered a final prediction: “A new crisis—and there always will be a new crisis—will test the euro zone severely, especially if, as is likely, Italy is the epicenter of the crisis. Political divisions will deepen as financial tensions unfold, and the crisis could tear through the euro zone’s financial safety nets.” That moment may now have arrived.
The extraordinarily severe COVID-19 crisis is set to confront European leaders with a choice they have so far ducked. Will they move the euro zone (or even the broader E.U.) toward a genuine federation, which subordinates national parliaments to a European parliament with unquestionable democratic authority? Will they instead wait for a miraculous economic recovery? If they wait, Italy’s (and Spain’s) debts — and financial-market pressures — will mount, forcing a decision between dramatic, politically concerted support or a retreat from postwar integration.
It is into these uncharted waters that Europe has now embarked."
The COVID-19 crisis has pushed the euro zone to its breaking point.

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