The social consequences of the coronavirus in the Eurozone

Sottotitolo: 
The crisis generated by the coronavirus pandemic has a global dimension, but it has especially affected the countries of the eurozone. And in Italy it has been both economic and political.

We have entered the new year under the attack of the coronavirus pandemic. At the same time, several vaccines have been developed to fight the pandemic. Science has done its job. However, the extension and the impact of vaccines remain uncertain. An effective mass inoculation is needed before the virus undergoes the metamorphosis already underway. The coronavirus mutation is already present, according to the WHO, in at least 25 countries, as it is principally the case of Great Britain and South Africa, and Brasil.   In this context, the timing of vaccination becomes essential. The longer it takes, the more possibility the virus has to multiply in its dangerous variants.

According to current forecasts, in most European countries the vaccination of the population can be completed by the end of the year. It is not a reassuring prospect. The virus took much less than a year to spread across different countries and continents.

1. The timing of the mass inoculation becomes the determining issue in the fight to reduce its disastrous impact on human beings and its economic and social consequences. This is particularly the case of the eurozone which is the region more hit by the pandemic at the world level,  and where Italy, Spain, Belgium, and Germany are among the most affected places, considering the high number of deaths.

There are in any case different approaches in reacting to the pandemic. The timing of the vaccine inoculation is in fact discriminant. In Britain, there is a commitment to inoculate 15 million people by the end of February. This requires a large mobilization of doctors and nurses along with a work schedule that lasts well into the night. To accelerate the mass vaccination it has been decided to give one immediate shot and a second dose after three months. It is estimated that at this rate by the spring the majority of the population will have been protected.

In Israel, at the beginning of January, over one million people had already been inoculated and all the population will be inoculated by the March elections when Netanyahu hopes to renew his premiership. But, unfortunately, the inoculation concerns only Israelian citizens, meanwhile no vaccination has been provided for the five million Palestinians of the West Bank and Gaza (Palestine’s exposed while Israel hails jab drive, Financial times, 6 January 2020).

The comparison with the measures underway in the European Union under the aegis of the European Commission is staggering in comparison with many different areas in the world.  There is no shortage of examples. In China, after having been the first country attacked by the coronavirus, the pandemic is now substantially eradicated. After the fall of the economy in many areas of the country at the beginning of last year, the economy has increased more than 2  percent and the current year will touch eight percent, the largest GDP increase for many years.

Other countries in North-east Asia, as South Korea and Japan, have been attacked by the coronavirus, but the prompt reaction has strongly limited its human and social consequences. The pandemic is also under control in Australia,. And New Zealand is now totally free of the pandemic after a strong reaction by the government under the leadership of prime minister Ms. Jacinda Ardern.

The European Union to which we will come back is in this framework, one of the areas more afflicted by the pandemic either for its extremely high diffusion or for the economic and social consequences.

2. In addition to the human consequences, the pandemic exacerbates the economic and social costs with its duration. Are there any remedies governments could put in place? The solution identified so far is the use of public spending in a previously unknown dimension. Approximately three trillion dollars had already been spent in the United States, essentially directed on extraordinary aid to families, at the end of July 2020 after the first coronavirus attack. An additional $ 900 billion was added in December, thus reaching a total amount of public intervention of around 18% of GDP. But that's not enough. President Biden has proposed additional spending of $ 1,900 billion for the current year, largely intended to support families, extend unemployment benefits,  and support, schools, state governments, and local communities.

If it overcomes the obstacles that Republicans will certainly pose in the transition to Congress, total public spending to counter the economic and social consequences of the pandemic will amount to over 25 percent of national income. On this basis, it is estimated that in the current year the United States will be able to recover the share of national income, equal to 3-4 percent of GDP, lost during the first year of the pandemic.

If in America public intervention is not yet fully defined, in Japan, public spending intended to counter the economic consequences of the coronavirus is already part of the economic maneuver underway. The government of Shinzo Abe had planned a public intervention for an extraordinary amount equivalent to a trillion dollars immediately after the start of the pandemic. The new government of Yoshihide Suga has decided to add the equivalent of another 300 billion dollars to it for a total amount equal to about 25 percent of the national income. For comparison, it is like a public intervention in Italy - with a population about half that of Japan - of over 400 billion euros.

The comparison with the choices made in the European Union is disconcerting. Under the pressure of Angela Merkel, who held the EU presidency in the second half of the past year, an intervention of 750 billion euros was decided partly as loans and partly as a grant. Italy and Spain, being the worst affected by the pandemic will be the major recipients receiving 209 and 140 billion euro, respectively.

In effect, significantly lower amounts than those deployed in the advanced economies that we have mentioned. But this is not the main point. The resources foreseen by the European Union will be available for investments staggered between 2022 and 2027, while for the current year can be authorized by the Commission an expense of just 20 billion euros.

The future expenditure under the supervision of the European Commission has to be destined fundamentally to the development of the green economy and technological innovation. Clearly, expenses that, in any case, would have been useful in the course of the next years, but that have nothing to do with the vertical current collapse of the economy, a new wave of mass unemployment, and the impoverishment of millions of families.

The fall in national income of Italy, above 10 percent of the GDP, equal to about 1.700 billion euros, is unprecedented in peacetime. If we assume growth in GDP of the order of three percent per year, assuming the optimistic forecasts of the governing bodies, we will have to wait until 2025 to return to national income prior to the coronavirus crisis. That is to say, the income of 2019 was still about five points lower than that of 2007, the year before the Great Recession.

3. In the context of the crisis, public spending - along with public debt - will increase everywhere. In Spain, the public debt, which was the lowest of the major eurozone countries (around 40 percent), already reached in the past year 120 percent of GDP. France, according to the forecasts of the Monetary Fund, will exceed the level of Spain. Italy, starting from a significantly higher amount already before the pandemic, will reach a debt amount of around 160 percent of GDP in 2020. The increase is an inevitable consequence of the fall in national income. In Japan, the public debt has exceeded a huge 260 percent of national income.

How is it possible to cope with the increase in debt?
The inevitable increase in the debt-to-GDP ratio caused by the crisis must be addressed by focusing on the future increase in the gross domestic product. And, in the current scenario of falling consumption and private investment, GDP can grow only with an extraordinary increase in public spending.

In the eurozone, apart from the limited aid from the ECB with specific purposes, countries unable to resort to the national central bank, have to resort to the issuance of public debt. That is drawing on private savings largely concentrated in bank deposits. Italy and Spain have the largest private savings at the national level in the eurozone - savings that exceed 1,700 billion in Italy, that is, a figure well above the national income of 2020.

What possibilities do they open up? In January, the issuance of government bonds with a duration of 15 years with yields of less than 1 percent was announced in Italy: the demand of savers was around 100 billion, far exceeding the supply of around 10 billion euros. This is not an isolated case. In Spain, a record 130 billion was offered for a 10-year debt issue.

Considering the low-interest rate offered by governments, there couldn’t be more favorable circumstances to tap into these resources and use them for public investments consistent with a broad economic recovery plan. Public debt inevitably grows in times of crisis both due to the reduction of public revenues and the higher public expenses, as it is the case of unemployment benefits and the support to sectors more hit by the crisis such as retail, leisure, and hospitality businesses.

In any case, public investment in appropriate and targeted sectors will restore growth and increase employment,  as it classically happened in the 1930s under the leadership of Roosevelt in the United States to deal with the Great Depression. Of course, the public debt will inevitably increase as it always happened during a crisis. But the burden of public spending will tend to decrease over the years with the resumption of growth and the increase in national income to a greater extent than the payment of interest on past debt.

As we have seen, this is the solution adopted by the governments of many countries affected by the pandemic crisis regardless of their political color. On the contrary, the policy of the European Union remains tied to the goal of eliminating the deficit and reducing public debt regardless of the actual trends in the global and national economy. In other words, it doesn’t avoid a ruinous deflationary policy.

The conditions set by the European Union that send investments to a more or less far away future, letting the crisis do its destructive job of the economy and social conditions is poisonous. Larger companies will be enriched and will benefit over the next decade from funds provided by Brussels for specific sectors of production, such as investments in climate change and informatics sectors. A large part of the population will suffer the consequences of the crisis in terms of increases in unemployment and the marginalization of the most disadvantaged regions.

What will be the policy a new government? Unfortunately, it is very probable that it will keep adapting the national policy to the policy imposed by the European Commission. A policy that, as we have seen, doesn’t confront the crisis that has brought a great part of the population to its knees. 

Other paths could be followed, like the examples to which we have referred show. The economic crises aren’t a divine condemnation, but economic processes that governments can face before they produce their disastrous effects. The Eurozone is currently the area most affected by the coronavirus pandemic worldwide. But, unfortunately, its policy so far has not been aimed at avoiding its economic, social, and human consequences. In many ways, it is bound to aggravate them.

4. In Italy, one of the countries most affected by the pandemic, the government of Giuseppe Conte has been put in crisis. Matteo Renzi's party Italia Viva with only 2-3 percent of forecasted vote, has challenged the government by withdrawing his support in the Senate. His main goal was the withdrawal of the Prime Minister, possibly keeping the same majority and gaining a  determinant role of his  presence of  his small party in the government ruling party. It was a wrong perspective. No center-left party wanted to return to the same unstable previous situation.

In the absence of a solution, apart from the political elections, the President of the Republic proposed a government of his own initiative based on  a larger majority regardless of the different political colors. Berlusconi's Forza Italia was the first party to declare its determination to participate in a new government. Surprisingly, Salvini's League declared the same willingness. In this case, the pressure of Confindustria, the association of industrial companies, was evident. The Democratic Party, although initially  with reluctance, offered its full support to the new government. which created the conditions for a new center-right government.  Only  Fratelli d'Italia (Brothers of Italy), the right-wing party of Georgia Meloni declared its opposition. 

The bouleversement was radical. Five stars, the large Italian party is no longer needed to form the majority of a new government under the leadership of Mario Draghi. Sure, they can be part of the majority, but their role would be redundant. The result is currently the transition from a center-left majority to a center-right one. It can last only a few months, just the time needed to present he program requested by the European Commission to deliberate the aid promised to Italy for the next years. Or it can remain in office until the election of the new President of the Republic, which could be the same Draghi, at the beginning of the next year.

But the League could also withdraw its support and create the conditions for the elections by aiming - in this case with Fratelli d’Italia - on a full victory for the center-right.

In any case, what we can see for the moment is the impact of the pandemic on political balance and the transition to a center-right government, with or without the support of the Cinque Stelle.

It should also be added that with participation in a center-right government, the Five Star Movement risks a split or, in any case, a massive loss of votes in the next elections that could reduce it to political insignificance. A different possibility would be its opposition to a new center-right coalition, which could place it as the main opposition force in a left front. But this may be pure speculation at the moment.

In any case, the pandemic crisis is going to make the eurozone’s present fragile framework that was already compromised worse. The Italian shift towards a rightwing government is a testimony of the insufficient and neoconservative way the eurozone has adopted in fighting the pandemic. It is an aspect of the more general economic and political crisis that the pandemic has aggravated in a large part of the Eurozone.

 
As long as the EU does not abandon its neoliberal course and go back to creating a European economy that serves all nations, citizens and the environment, it will continue to create the crises we are living through.

Antonio Lettieri

Antonio Lettieri is Editor of Insight and President of CISS – Center for International Social Studies (Roma). He was National Secretary of CGIL; Member of ILO Governing Body,and Advisor of Labor Minister for European Affairs.(a.lettieri@insightweb.it)

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