The eurozone is on another economic planet. The Bank of Spain has just downgraded its GDP forecast again, expecting a contraction of up to 12.6pc this year, with full recovery pushed out until 2023.
France has lifted its forecast slightly to minus 10pc this year (from minus 11pc) but may have jumped the gun. Emmanuel Macron is determined to avoid a second lockdown but the 14-day toll of new cases rockets to 198 per 100,000 and is now worse than the first wave in March, with deaths ratcheting up this week to 1.0.
The French Conseil Scientifique has already laid out the criteria for drastic counter-measures. Should it declare that the pandemic has again reached a “critical state”, Mr Macron cannot ignore the advice except at great political risk. The French test and trace programme has been just as chaotic as the British version.
Italy has so far avoided second wave alarms but damage below the company water line is already grave. A paper for the Review of Corporate Finance Studies – The Covid-19 Shock and Equity Shortfall – found that 17pc of 81,000 Italian companies sampled will have negative net worth within a year. The same pattern probably holds for the whole of southern Europe.
EU leaders do not have any economic margin to play with. The Stoxx 600 index of European banks this week fell below levels seen during the panic sell-off in March, or even seen during the eurozone banking crisis.
It has been a slow death spiral, made worse by regulatory overkill and negative rates that erode their bread and butter lending models. Boston Consulting says the net interest margin of banks has been whittled down from 250 basis points to almost zero. Lenders will soon face the hammer blow of mass insolvencies from Covid-19 as government loan guarantees expire.
Consultants Oliver Wyman estimate that bank losses could reach €830bn over three years, with half of the European lending system barely surviving, unable to generate enough from retained earnings to rebuild their defences. They are already acting preemptively to shore up their capital buffers, tightening credit lines to vulnerable firms, threatening to set off a vicious circle.
European leaders hailed their €750bn recovery fund as a Hamiltonian moment that finally endowed the EU with its own fiscal firepower, rising to the challenge of the pandemic. In reality the EU did just enough to muddle through the immediate crisis.
“Rather than a ‘game changer’, we see it as another example of the same ‘game’ that has prevailed for the past decade. Whenever the cohesion of Europe faces clear and present danger, European governments agree to the minimum demonstration of unity to keep the risk of break-up at bay,” says Arnaud Marès, Citigroup’s chief Europe economist and the former right-hand man of Mario Draghi at the European Central Bank.
What they created was a Brussels slush fund. The money does not kick in until mid-2021 and is then spread thinly across the EU over five years, with political strings attached. Some of it displaces existing spending. The additive impact is trivial.