Euro zone government debt will surge this year on the coronavirus pandemic, but while another debt crisis is unlikely, large differences in indebtedness as countries emerge from the downturn could seriously test their unity.
FILE PHOTO: The skyline and the European Central Bank are pictured during sunset in Frankfurt, as the spread of the coronavirus disease continues, Germany March 31, 2020. REUTERS/Kai Pfaffenbach
Neither was there the ECB’s Outright Monetary Transactions scheme of unlimited sovereign bond purchases or an experienced bailout fund with an unused lending capacity of 410 billion euros, ready to lend cheaply and practically without conditions. “The tail risk that a future Italian government may want to leave the euro is one the market is watching. It’s not about the details, it’s about the risk of political backlash,” he said.
“I would bet 100 euros that a debt crisis will not return in the next one or two years,” said ING economist Carsten Brzeski, noting the euro zone’s very strong political will to avoid such a crisis when all its economies are suffering from the epidemic. “There is a risk that the current crisis leads to further divergence of fundamentals among euro area countries,” said Reza Moghadam, chief economic adviser at Morgan Stanley.The solutions adopted so far have failed to address the problem of debt sustainability in high-debt countries like Italy and of euro zone “fragmentation”: different rates of growth, productivity, unemployment, or bank lending, Moghadam said.
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