By D. Lahman
In 2012, when Italy's sovereign debt crisis threatened to tear the euro apart, the then president of the European Central Bank (ECB) Mario Draghi successfully came to the rescue, saying that the ECB will do everything possible to save the euro. For the sake of not only Italy, but also the global economy, it is hoped that Ms. Lagarde will be able to successfully repeat this feat. This is especially true given the huge debt of Italy on public debt and the importance of this debt to the European banking system.
If the shock of coronavirus for the European economy is severe, it is likely to be even more devastating for the Italian economy. Not only is the whole country now isolated and forced to limit employees' access to jobs, its tourism sector, which accounts for up to 6 percent of the country's economy, is completely paralyzed. According to various forecasts, Italy will lose from 5 to 10 percent of GDP. It should be expected that the country's budget deficit will grow, and public debt will also seriously increase by the end of the year.
The real question is whether the ECB will have the political will to cover the huge amounts of money that Italy may require. The crisis of Italian sovereign debt, whose economy is 10 times larger than the Greek and is the third in the EU, could destroy the euro zone. Against this background, will Madame Lagarde be able to convince her German and Nordic partners to allow the ECB to lend Italy on such a scale?
The trouble is that the size of the proposed assistance will be enormous. With hepaid public debt of about US $ 2½ trillion and a widening budget deficit due to a deep recession, the Italian government may require US $ 500 billion of government support in 2021 and 2022. At the same time, Italy’s troubled banking system may require huge financial support from the ECB.