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Eurozone Economy: EU officials are worried about the economic damage

Eurozone Economy: EU officials are worried about the economic damage

The article is published in the Financial Times.

With Covid-19 infection rates in Italy and many other countries soaring well above those reported during the first wave in the spring, the big worry for European policymakers is that the restrictions on struggling businesses like Due Ladroni may stretch them to breaking point and put strain on the region’s banking system.

Across Europe, varying degrees of national lockdowns have been reintroduced to try to contain the resurgence of the pandemic, which is once again threatening to overwhelm public healthcare systems. Restaurants, bars, gyms, cinemas and theatres have been forced to close and curfews are in force across the region, while France, Ireland and Belgium have closed non-essential shops — prompting uproar from independent shopkeepers.

Even though the new restrictions are milder than in the spring and most schools and factories are staying open this time, the measures are still expected to cause another downturn in the economy, which remains well below pre-pandemic levels despite a strong third-quarter rebound.

With several vaccines now close to going into production, there is at least light at the end of the tunnel. But EU officials are worried about the economic damage that will be caused before life returns to anything approaching normal.

Christine Lagarde, European Central Bank president, said last week that the second wave still poses considerable danger for the economy. “Firms that have survived up to now by increasing borrowing and drawing on their savings could decide that remaining open no longer makes business sense,” she added.

The ECB is warning that fallout from the pandemic could produce €1.4tn of non-performing loans in a severe scenario — more than the 2008 crash. While this prognosis is seen as alarmist in some quarters, it stirs memories of a decade ago when an economic crisis morphed into a financial crisis that threatened the existence of the eurozone.

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