Grim facts of a fragile economy, a divided EU and a damaged planet

The global economy is plunging into recession as huge uncertainty remains about the coronavirus, writes Dan O’Brien

‘A quarter of Italian public spending in the mid-1990s went on debt servicing’

THE global pandemic has sent our interconnected and interdependent world into shock. It has shown how fragile human constructs are. And the bigger and more complex the construct, the more fragile they appear to be, as will be proven if the effects of the current pandemic are more destructive than those of a similar pandemic — the Spanish flu — just over a century ago, something that already seems likely.

Last week brought only a few rays of hope on dealing with the outbreak itself. Known deaths from coronavirus in Italy and Spain appear to have levelled off.

But even that is questionable, as everyone who dies is not being tested in every country. It may be that the virus is less lethal than is feared: it may be more lethal. There is a small but growing body of evidence — from excess mortality data in the most-affected countries — to point to a virus killing more people than is currently understood.

The news over the past week on the livelihoods of the planet’s seven billion people was even worse than the health data in some regards. Few if any economic indicators have been levelling off. As has been the case over the past month, economic data with each passing day last week confirmed that the world economy is headed for its steepest plunge in living memory. The bottom cannot yet be seen. Where the bottom is will depend to a great extent on bringing the virus under control.

The scale of downturn here in Ireland was brought home in all its brutality last Thursday when it was revealed that the number of people dependent on the State for their incomes has grown more in the past few weeks than it did over three years in the last recession.

At the worst of that slump, in the early years of the last decade, 460,000 people were on jobless benefit. Last Thursday’s figures for March showed that more than half a million people are already on some form of jobless benefit, or are having their pay subsidised by the State. We are well on the way to seeing all of the job gains since the nadir of the last downturn being obliterated, at least in the short term.

We, in rich Europe, are in a better position than most parts of the world. And with the European Central Bank printing money in large quantities, governments in the single currency zone can borrow freely and cheaply to deal with the emergency.

Despite this, strains within Europe are already rivalling those which existed during the only previous threat to the existence of the European Union — the 2010-12 euro debt crisis.

The week before last, the Irish Government signed a letter with eight other eurozone members calling for a common eurobond, aka a coronabond. As none of its erstwhile allies of northern European states in the so-called new Hanseatic League signed the letter, the wisdom of joining the largely southern group of countries was questionable. Since then the matter has continued to cause real division despite the urgency of more pressing matters for all national governments.

Before looking at how serious that issue is becoming, consider a second strain on the bloc that grew last week. The Irish Government signed a second letter, this time with 12 other EU member countries. In this case, it was absolutely and unquestionably correct in doing so.

Last week the Hungarian government used its majority in parliament to allow it rule by decree. The Hungarian premier, Viktor Orban, has long had authoritarian tendencies. Last week’s move was a classic case of such a leader using an emergency to close down dissent and cement his position in power.

The governments of the 13 countries stated that they were “deeply concerned about the risk of violations of the principles of rule of law, democracy and fundamental rights arising from the adoption of certain emergency measures”.

The signatory countries were, with the exception of Hungary’s neighbour Austria, all longer-standing members of the bloc. None of the 12 members which have joined since 2004 signed. Most of that dozen are former communist countries with, it can plausibly be argued, weaker democratic cultures. This potential east/west division, if it were to deepen, could further weaken the bloc just as the longer-established north/south division on economics worsens.

This north/south problem is particularly intractable, not least because both sides have valid points. Public disagreement on the issue continued last week, and it did so despite the European Central Bank ensuring that all governments in the zone can borrow the massive amounts they need to boost healthcare capacity and fill the void left by falling tax revenues. The continued discussion of what is not an urgent priority in the current dire circumstances underscores the depth of feeling about the matter.

That feeling is most acute in Italy, where the pandemic has been more deadly than in any other country in the world.

Euroscepticism in Italy was non-existent when your columnist lived there in the 1990s. It began to emerge in the 2000s when people — wrongly — came to blame economic weakness on membership of the euro. The euro-crisis accentuated it, with many Italians feeling — with some justification — that they were being dictated to and demeaned by some to the north.

Those feelings have become more deeply held since the health emergency erupted; with a common view expressed in the country that European solidarity has been in short supply in Italy’s hour of need. There is certainly truth in this. Italian advocates of common eurozone debt issuance also make the valid point that coronabonds should be about future government spending, not past debt.

Fiscal disciplinarians in the north say — not inaccurately — that the past affects the future, including their future.

A quarter of Italian public spending in the mid-1990s went on debt servicing. Those costs collapsed when it became clear that Italy would join the euro and reap the benefit of much-lower interest rates. Italian governments at the time did not use these savings to bring down one of the highest debt-to-GDP ratios in the world. This was irresponsible and, as with any government that has high debt levels, it has left the state with less leeway to help its citizens in this hour of need.

There are also issues which have always worked against joint issuance of debt in the past. They have not gone away. How would the proceeds on a eurobond be distributed across the single currency zone?

How would the cost of servicing it be spread? Would certain taxes be earmarked for that purpose? Would there be rules on how it could be spent if it went directly to national capitals? Would the raising of common debt, distributed inevitably from an EU in institute, mean a bigger role for that institution in determining how it is spent? How would democratic oversight of that institution be organised? And, ultimately, how would such a significant deepening of European integration be legitimated by the peoples of the 19 countries which share the single currency?

These are enormous questions of profound political and economic consequences. They will not be answered in the most severe emergency that the continent, and indeed the planet, has faced in a lifetime.

Thankfully, the matter is not urgent. As of close of business last Friday, the Italian government could borrow money for 10 years at an interest rate of 1.5pc. That is close to the rate it was paying at the start of the year when the coronavirus had barely impinged on Europeans’ consciousness.

As long as the ECB continues its de facto mutualisation of public debt by purchasing government bonds with printed money, eurozone governments will have the cash they need to address the emergency.