Coronavirus EU: Italy’s plight shows bloc can’t cope, says expert ‘Good times only system’

Barney Reynolds, a partner at Shearman and Sterling LLP, was talking after Italy’s Prime Minister welcomed the European Central Bank’s announcement of a £680billion (750billion euros) bond buying stimulus package intended to help economies struggling to cope in the face of the outbreak, which has hit his country harder than anywhere in Europe. The scheme will inject cash into the system by buying extra government and corporate bonds until the end of the year at the earliest. However, Mr Reynolds, co-author of a paper published last month, Managing Euro Risk, told he saw huge drawbacks.

None of the EU27 had agreed politically to integrate the eurozone, with the massive resultant risk to both themselves and the rest of the world, as outlined in his paper, Mr Reynolds explained.

He added: “Italy has a huge problem with non-performing loans (NPLs) and the lack of a market and appetite for its government bonds, the latter being key to it raising money to cover the costs of its state.

“There’s no eurozone or EU funding.”

As a result, Italy wanted the ECB to buy up its NPLs, Mr Reynolds said, which in itself would mean the ECB exchanging them for cash.

The consequence of such a move would be vast amount euros ploughed into the country’s financial system, adding up to hyperinflation when the market starts to recover, unless there was a way to get the cash out of the system again at that point.

Additionally, the banks were likely to be highly reluctant to buy back NPLs, meaning the ECB would not be able to offload them back again and would lack an obvious route to retrieve the money from the system.

Mr Reynolds said Italy was also wanting the ECB to buy its government bonds in order to enable it to issue debt into the eurosystem.

He added: “As a result of this the eurosystem is mutualising the risk exposure of each member state to the others, and achieving the mutualisation of debts covertly.

“I wonder whether Italian citizens know they’re so exposed to German government debt, or vice versa, and whether they’d sign up to this.”

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As for Schengen, which has been rendered all but unworkable in recent days with numerous countries imposing bans on visitors from outside the country, Mr Reynolds added: “The temporary dissolution of Schengen shows that when the chips are down national barriers go back up.

“So it’s a “good times only” system.

“That’s sort of okay for free movement, but in the context of money it isn’t at all okay.

“What it means is we can’t work out exactly when the breakpoint is in the system at which member states look after themselves and the Eurozone falls over.

“The Schengen precedent shows there is a pain point at which member states become member states again and protect themselves first, others second.”

Speaking to the Financial Times about the ECB’s intervention in accordance with the European Stability Mechanism (ESM), Mr Conte said: “The ESM was crafted with a different type of crisis in mind, so it must be adapted to the new circumstances so that we can make use of its full firepower.

“The route to follow is to open ESM credit lines to all member states to help them fight the consequences of the COVID-19 epidemic, under the condition of full accountability by each member state on the way resources are spent.”

So far, COVID-19 has claimed the lives of 41,035 cases of COVID-19 and 3,405 deaths – more even than China, where the outbreak started towards the end of last year.

Mr Conte said: “We are confronted with an exogenous, global shock that has no precedents in modern history.”

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