It will soon become clear that a bigger bazooka is required to prevent ‘long economic Covid’ setting in for the eurozone
Europe’s double-dip lockdowns will be followed by double-dip slumps in short order, with potent implications for debt solvency in the South and for the willingness of the North to fund further rescues.
Leaders imagined - or pretended to imagine - that they had more or less wrapped up the Covid episode months ago. They celebrated a “Hamiltonian” leap forward that seemed to conjure away the risks of sovereign debt crises and aborted recovery, so long as you did not look too closely at the varnished figures or time-sequencing of the Recovery Fund. Markets went along with the sleight of hand.
But it was an illusion. The existential test of Europe’s monetary union and political project is yet to come as emergency support winds down in the most vulnerable countries and political tempers fray everywhere.
“We’re going to go from recession to depression,” says Juan Carlos Robles from Spain’s General Economic Council. “The economy is shattered. We’re incubating a brutal explosion of unemployment. The great wave of lay-offs is coming at the end of the year.”
The question is whether the EU’s confederate states will bite the constitutional bullet and fold their futures together in a genuine fiscal debt union backed by treaty change, or continue rolling out half-measures that never quite solve the problem.
The second great lockdown is a treacherous moment for Europe’s political class. In France, Emmanuel Macron’s ministers are already facing criminal lawsuits for the carnage that swept through French care homes in the first wave, a near replica of Britain’s unstated decision to sacrifice the elderly to shield the health system…
I suspect that Lockdown Two and a double-dip recession in the Latin bloc will bring matters to a head next year. Germany and the northern bloc will have to decide whether to go all in and agree - this time - to rebuild Europe on foundations that are genuinely Hamiltonian, or stand back and let an economic and political reckoning run its course.