It went from excessive lockdowns and incarceration of children for seven weeks in the first wave, to insane claims the virus had been ‘defeated’ over the summer, and now back to a blanket -fire, but this time under the teeth of the mobilized resistance. .
The International Monetary Fund estimated before the latest measures that Spain’s GDP will contract 12.8% this year, recovering 7.2% next year. The risk now is that there will be no recovery. Economic damage from a second wave that runs deep into 2021 could lead to recession metastasis and turn into a stagnation trap.
Ignazio Visco, governor of the Bank of Italy, fears the ‘Keynesian paradox of savings’ could trigger a ‘downward spiral’ as the pandemic continues and frightened families and businesses fight together, a a process that can only be verified by massive monetary and fiscal intervention.
The incipient deflation worsens the situation. Real interest rates rise, tighten conditions procyclically, and corrode debt dynamics. “This is the classic mechanism of debt deflation that we saw during the Great Depression,” he said. Corriere della Sera.
The Covid double-dip brings this horror story into play. The OECD’s worst-case scenario – which is no longer implausible – sees Italy’s debt-to-GDP ratio explode to 195% of GDP by the end of next year. The ratio climbs to 158% in Portugal and 229% in Greece. These are levels that cannot be sustained in low growth economies without a permanent European shield.
The EU Stimulus Fund cannot play this role even though it has assumed totemic importance for EU insiders and the media. There will be no significant disbursements until the end of 2021, with most of the money arriving in subsequent years, by which time it is too late.
The actual total is only 390 billion euros – the grant component of the fund – and not the 750 billion euro title. Italy’s budget plans suggest that most of the grants will be used to replace spending already planned rather than adding the net fiscal stimulus.
The South will not touch the loan component due to Troika conditions unless it is in serious difficulty. Since Italy is a net contributor to the EU budget and has to pay for the fund, the net transfer to Rome will amount to around 0.6% of GDP per year from 2021 to 2023, plus or minus a rounding error compared to the scale of the Covid shock.