Economic shock from coronavirus forces Europe to face its ‘Hamilton moment’

Goldman Sachs expects Italy’s economy to contract by 11.6pc this year. Borrowing will explode. The debt ratio will blow through 150pc of GDP in short order - uncharted territory for a sub-sovereign borrower with no monetary or exchange rate levers under its own control, and with a banking system trading at distress levels even before the pandemic hit. 

Nor can Spain, Portugal, Greece, or Cyprus afford to spend their way through the crisis, and all are being devastated by the collapse in tourism. Goldman thinks Spain’s economy will contract by 10pc this year and the debt ratio will jump 22 percentage points to 120pc of GDP. 

The euro will be unworkable if Club Med nations emerge shattered from Covid-19, their industries broken, again facing mass unemployment before they have recovered from the austerity overkill and debt deflation of the last decade. EMU narrowly survived one depression in Southern Europe. It will not survive two.

“This is a very dangerous moment for Europe. Italy’s GDP is still 5pc below 2008 levels and now it is being hit by another shock that could take ten years to recover from, “ said Codogno, who was chief economist at the Italian treasury through the last crisis.

The northern creditor states face their “Hamiltonian” crunch moment. Will they finally do what Virgina did in 1790 when it agreed - as the richest of the 13 states - to pool the legacy costs of the Revolutionary War and establish a US federal treasury with expansive powers? Will they bite the bullet on fiscal union? Will the “frugals” and “Hanseatics”, and above all Germany, at last face up the implications of monetary union - so stubbornly resisted for two decades?