By Ashoka Mody
Italy needs a €500 to €700 billion ($572 billion to $801 billion) precautionary bailout package to help reassure financial markets that the Italian government and banks can meet their debt payment obligations as country’s economic and financial crisis becomes more fearsome.
Just as the human costs of the coronavirus have grown alarmingly, Italy’s crisis could soon become unmanageable, potentially causing mayhem in world financial markets.
This can’t just be left to the eurozone nations. Not only the International Monetary Fund but even the U.S. will need to be involved, perhaps, with a line of credit in case the rescue requirements escalate.
Time is short. Germany and France, the 19-member eurozone’s two largest economies, are themselves about to experience rapid spread of the virus, and their economic and financial systems are already under acute stress. If pushed to entirely bear Italian risks, they may face unpleasant credit downgrades.
Italy, the bloc’s third-largest economy, has long been the eurozone’s fault line. And, as physicist Per Bak wrote, when one fault line breaks, other cracks weaken, causing a cascade of earthquakes.
Virtually every international and domestic economic force is arrayed against the country.
The Italian economy has not grown since joining the eurozone in 1999. Per-capita income, adjusted for purchasing power parity, has remained stuck at $35,000. The economy has remained in near-perpetual recession over the last decade and was already contracting along with world trade before the coronavirus struck. The government’s debt burden increased to a staggering €2.3 trillion, which amounts to 134% of the country’s GDP.
By late last year, falling world trade had pulled Europe into near-recession.
The coronavirus will almost certainly cause the Italian economy to contract by about 3% in the first half of 2020, although the damage could be much larger than that.
As the Chinese economy slows down further — and very likely itself contracts— in the coming few months, the lack of Chinese supplies of critical parts and ingredients will cause continuing damage to world production and trade. That damage is spreading to Germany, which even as it struggles remains Europe’s strongest economy and an important market for Italian manufacturers.
In Italy, the virus has forced not just the lockdown of the country’s most vibrant regions — Lombardy and its fashion and finance hub in Milan, as well as large parts of Veneto and Emilia-Romagna regions — but now the entire country as of Tuesday. As people stay home and demand for services falls, the economically vulnerable — especially young Italians on precarious temporary jobs — will lose incomes, and demand will shrink further. And with one of the oldest populations in the world (about 23% of the people are above the age of 65), the coronavirus-induced illness and mortality — and the associated economic and financial stress — could persist longer than elsewhere.
Indeed, even if the numbers of new cases begin to fall, the disruption to economic activity will continue. Stock markets have taken note. Among the world’s major economies, the Italian stock market index /zigman2/quotes/210598024/delayed IT:I945 +0.47% has fallen at the sharpest pace.