Eurozone crisis: EU facing economic disaster with two countries at centre of nightmare

Europe is headed for a steep recession amid weeks of ongoing rows that laid bare the 27-member bloc’s disunity in the face of the coronavirus crisis. And now an expert has warned the EU could be plunged into another debt crisis, like the one seen in 2009.

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Simon Baptist, global chief economist at consultancy The Economist Intelligence Unit, predicted the bloc’s third-largest economy Italy and Greece, which recently clawed itself back from financial ruin, would be a the centre of it.

The stricken Mediterranean countries remain the biggest threat to the future of the EU despite a number of years of gruelling recession and austerity imposed from Berlin and Brussels.

He told CNBC: “I do think we will see some issues there, possibly we could see a euro zone crisis come back with countries like Greece or Italy likely to be at the centre of that.”

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The eurozone is on the verge of a crisis (Image: GETTY )

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EU news: Brussels bosses are under pressure over the bloc’s handling of the crisis (Image: GETTY )

Mr Baptist warned a number of countries could default on their debt in the coming months as governments are under pressure to increase their spending limits to counter the economic damage caused by the COVID-19 pandemic.

He said: “A lot of emerging markets are reliant on international investors, international financial flows to get the funding to run a budget deficit, they find it harder to borrow in local currency — although there are a few exceptions.

“At the moment, with this big turn to risk aversion in international markets, even though there may be some emerging world governments that would like to spend more, they’re not going to be able to get funding.”

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EU news: Greece is on lockdown (Image: GETTY )

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It comes after EU finance ministers last week agreed on a package of measures worth half a trillion euros to cushion the blow of the coronavirus pandemic.

However it left unresolved the most contentious question of how to share the financial burden that has so bitterly divided them.

The deal left matters open to further arm-wrestling between the divided member states, whose national leaders will meet via video conference on April 23.

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EU news: Greece has already clawed itself back from economic ruin (Image: GETTY )

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EU news: Italy is facing economic chaos as the coronavirius grips (Image: GETTY )

The agreement includes almost unconditional use of the euro zone’s European Stability Mechanism (ESM) bailout fund for loans to governments, a scheme to subsidise wages so that firms can cut working hours rather than jobs, and a plan for the European Investment Bank to step up lending to companies.

However, ministers kicked into the long grass the question of how to pay for a temporary recovery fund for Europe because it goes to the heart of a disagreement over jointly issued debt.

This had been the stumbling block all along, pitting a camp of financially ailing southern states led by Italy against the Netherlands as the bulwark of the fiscally conservative north.

The EU has already relaxed limits on state aid and public spending to help its 27 member states combat the slump and restart growth, and the European Central Bank has approved a €750 billion bond purchases programme to keep credit cheap. 

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It comes after the heads of the bloc’s Brussels-based institutions said the EU’s next long-term budget will raise funds to sponsor economic recovery after the coronavirus pandemic. 

Charles Michel, president of the European Council made up of the bloc’s 27 national heads of state, said leaders and governments will discuss a reworking of plans for the 2021-27 EU joint budget during a videoconference summit on April 23.

Ursula von der Leyen, European Commission President, said: “The next European budget has to be the European answer to the corona crisis.

“A European budget that with all its might is able to leverage the necessary money for a huge investment initiative … in order to really restart the economic process. 

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EU news: Italy could be at the centre of the eurozone crisis (Image: GETTY )

“We’re not talking about a billion (euros), we’re talking about a trillion, looking at the investment initiative that has to be done.”

She said spending from the bloc’s joint coffers would be frontloaded to inject as much funds as possible in the first part of the seven-year scheme. 

The EU is discussing how to finance recovery from a deep recession that is expected to follow the pandemic.

Ideas range from increasing the overall volume of the next joint budget to channel more funds to the most-affected countries, to using it as a financial vehicle to borrow funds on the market and leverage them to spur large-scale investment.

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