The Covid-19 Crisis, Italy and Ms Merkel’s Turnaround: Will the EU Ever be the Same Again?

Luigi Bonatti and Andrea Fracasso

No 25, EconPol Policy Reports from ifo Institute - Leibniz Institute for Economic Research at the University of Munich

Abstract: The functioning of the Eurozone was irreversibly transformed by the European debt crisis and now, as a consequence of the Covid-19 pandemic, a new and even more devastating crisis has hit the EU. German Chancellor Angela Merkel has abandoned her opposition to substantial intercountry transfers and any form of debt mutualization, a turnaround motivated by the exceptional circumstances brought about by the pandemic. The risk that Italy’s fragile financial, economic and political situation, exacerbated by the current crisis, could destabilize the entire Eurozone in the absence of sizeable external assistance was probably one of the main determinants of the German government’s policy shift. In this policy report, Luigi Bonatti and Andrea Fracasso argue that this move will be insufficient to drive Italy into a sustainable and satisfactory growth path, and it will need further financial support from EU institutions and member states. Should they agree to provide financial assistance to the Eurozone's most vulnerable countries and make permanent what was supposed to be temporary, or expose the zone to a possible implosion?

Date: 2020
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