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Bruno Cavalier
Chief Economist at ODDO BHF
All European countries are affected by the coronavirus pandemic. To curb its spread, all of them have set up a confinement system. As a result, all European countries will suffer the most severe recession in their modern history. No country can durably restore normal living and working conditions if its neighbours are not out of the woods themselves. All in all, there is a strong argument in favour of coordinating health measures and fiscal policies. Europe is failing in both areas. The Eurogroup meeting yesterday ended in failure. There is no joint and several responses to the economic crisis caused by the pandemic.
Rejection of the coronabond…watch out for the political fallout
Europe is the continent most affected by the coronavirus: accounting for 54% of cases and 73% of deaths, according to the latest WHO report of 7 April. The human toll varies from one country to another, partly reflecting the quality of health systems (prevention, capacity to treat patients), but all suffer the same fate. This creates a common experience. Travellers on the Titanic, too, had the same experience, but the survival rate was not the same for all. No need to develop the comparison further. The current crisis reminds us that European countries, because of their disparities in economic and financial matters, do not have the same means of action. The question facing European leaders is whether they want to avoid this crisis from widening these intra-Eurozone disparities and making them unsustainable. In short, is there a common destiny? This note examines the public finance challenges posed by the pandemic and current and future ways to overcome them.
Convergence/Divergence – The functioning of a currency area does not imply that all its members are homogeneous but requires a stabilisation tool in case of asymmetric shocks. This was not envisaged at the creation of the euro because it was thought that the "convergence criteria" would be sufficient to reduce asymmetries. The recession of 2008-2009, followed by the double dip of 2011-2012, have put an end to this illusion. Disparities widened sharply from 2008 to 2013 in the real economy (unemployment rate, chart lhs) and in financial conditions (corporate borrowing rate, chart rhs). These differentials then largely disappeared once it became clear that the ECB would not tolerate financial fragmentation in the Eurozone (see Draghi's speech in 2012 and all subsequent ECB actions).
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