In fact, the price of reaching the agreement was impotence. While you may be reading headlines of an impressive sum of €500bn to rescue Europe, the truth is far less heroic. On Thursday night, impasse gave way to an agreement. And they had to find a way to avoid circumventing the ban on debt-sharing without which an additional €2tn public expenditure would crush members such as Italy, Spain and Greece thus reviving the spectre of disintegration. To counter the oncoming tsunami of bankruptcies, they had to emulate the British, American and Japanese stimuli programmes by channelling approximately 8% of total eurozone income (€1tn) into fresh public expenditure, while also setting aside another such sum for an investment fund to power up the post-Covid-19 recovery. It is in the shadow of this riddle that the Eurogroup met on Thursday night. Except that this debt-sharing is banned by the treaties that created the eurozone, at the insistence of the northern european countries running a trade surplus with the rest. The only way out of this trap is for the new debt not to fall on the weak shoulders of the most indebted eurozone countries but to be shared across the eurozone. With the countries worst hit by Covid-19, such as Italy, being the most indebted and thus the least able to shoulder the necessary new debt, an impossible conundrum emerges: the new debt needed to revive the private sector will push the state into default, so destroying the banks whose capital is mostly government debt and, in short order, the rest of the private sector. The coronavirus recession is now pushing it beyond them. The euro crisis that began in 2010 stretched this monetary architecture to its limits. The massive boost in public debt that is now so necessary is hampered by the quaint arrangement of sharing a central bank that, on the one hand, has no common treasury to lean against and, on the other, is banned from backing directly the 19 treasuries that must borrow in euros to fight the crisis. The challenge facing the 19 countries of the eurozone is unique. If governments fail in this, the sum of private and public expenditure (which equals aggregate income) will crash even faster, bankruptcies will b urgeon and government tax revenues will collapse further in the medium turn. ![]() ![]() Just as in the United Kingdom, the United States or Japan, the precipitous falls in private incomes must be counterbalanced by substantial increases in public expenditure. The economic shockwaves caused by a lockdown do not care what currency we use. Most of continental Europe using the euro is in lockdown. Besides constituting an epic dereliction of duty, the Eurogroup’s decision dealt a decisive blow to the foundations of the European Union – much to the delight of Europe’s critics and enemies. After weeks of impasse, the Eurogroup gathering of finance ministers, whose countries share the euro, reached a decision on their collective response to the coronavirus pandemic’s economic impact. Europe suffered a historic defeat on Thursday night.
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