Brussels — Eurozone government debt will surge in 2020 due to the coronavirus pandemic, but while another debt crisis is unlikely, large differences in indebtedness as countries emerge from the downturn could seriously test their unity.
“As the ECB is literally cleaning up all the secondary market ... the risk of a sovereign debt crisis is close to zero,” Saxo Bank’s economist Christopher Dembik said, echoing many economists and officials.The biggest difference compared to the eurozone debt crisis of 2010-2012 is the ECB. Then, there was no unconditional ECB pledge to do “whatever it takes” to support the euro. As soon as it was made, in mid-2012, the crisis ended.
“The ECB can buy a lot of Italian bonds but it cannot convince markets that Italy wants to stay in the euro forever,” said Holger Schmieding, chief economist at Berenberg bank. “The tail risk that a future Italian government may want to leave the euro is one the market is watching. It’s not about the details, it’s about the risk of political backlash.”
By contrast, Germany is expected to increase its debt by only nine points to 69% and the Netherlands by 10 points to 58%. Austria, Finland, Slovakia and the Baltics will see similar or slightly bigger increases, but to much lower levels than southern states. “There is a risk that the current crisis leads to further divergence of fundamentals among euro area countries,” said Reza Moghadam, chief economic adviser at Morgan Stanley.The solutions adopted so far have failed to address the problem of debt sustainability in high-debt countries such as Italy and of eurozone “fragmentation”: different rates of growth, productivity, unemployment, or bank lending, Moghadam said.
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