The EU’s economic woes are set to continue, with Euronews confirming that both Italy and France entered a recession in the first three months of this year while Spain’s GDP fell sharply.

The Worst GDP Numbers in a Decade

France experienced the largest fall in GDP since 1949 as its GDP fell by 5.8 percent in the first quarter. This is much sharper than the 1.6 percent contraction observed in the first quarter of 2009. Italy’s GDP fell by 4.7 percent in the first quarter. If this figure is confirmed, it would be the worst reading since 1995.

The Spanish economy shrunk by 5.2 percent, which is the worst reading since the 1970s. Furthermore, the EU’s GDP decreased by 3.5 percent in the first quarter of this year, according to Eurostat, the bloc’s official statistics agency. The drop was even more acute for the eurozone’s 19 member states, with GDP to have contracted by 3.8 percent quarter-on-quarter.

The news comes as the European Central Bank (ECB) announced that it had kept interest rates unchanged, but was ready to increase its coronavirus stimulus program if necessary. The central bank also announced that it had eased lending conditions for banks. ECB President Christine Lagarde said at a press conference on Thursday that the eurozone is facing an “unprecedented” economic contraction.

Was Creating the Eurozone a Mistake?

The coronavirus has tested the EU’s resolve to maintain the eurozone on a scale not witnessed since the 2008 recession. Both Milton Friedman and Martin Feldstein warned when the eurozone was established in 1999 that the EU had made a significant mistake by establishing a monetary union before it had created an effective political union.

Out of the three eurozone economies that have entered a recession, Italy’s is the most vulnerable and what happens here will determine the rest of the single currency’s fate. Desmond Lachman, a resident fellow at the American Enterprise Institute, wrote in the Hill that Italy’s prospects of a quick post-coronavirus economic recovery are slim. Whilst the country is stuck in the single currency, it does not have its own monetary or exchange rate policy to jump-start its economy. The same applies to France and Spain.

Although the ECB is initiating every financial measure possible to prevent the collapse of the eurozone by offering TLTROs (targeted longer-term refinancing operations), which are loans that the central bank offers at cheap rates to banks in the eurozone, market participants worry about debt sustainability in the longer-term.

Considering the public finances of France, Spain and Italy are highly compromised, they are unable to use their own fiscal policies to stimulate their economies. Italy’s poor public finances have restricted it to a €25 billion fiscal stimulus that equals 1 percent of its GDP.

The Next Two Years Should Worry EU Leaders

Should these three nations fail to experience a quick recovery from a deep recession, they will experience large budget deficits that would put their public debt on an unsustainable path. Italy’s banking system may experience a solvency problem as its non-performing loans would continue to increase to staggering levels.

The next two years should worry EU leaders. The Italian Government in particular could need more than $1 trillion in financial support to finance its deficit. Its banking system may also need the same amount of money just to stay afloat.

In the wake of the Italian, French and Spanish recessions, the ECB’s latest measures prove that they will reluctantly purchase these nations’ government bonds just to prevent Italy in particular from quitting the eurozone. However, without the financial sovereignty to speed up their own recoveries, it is questionable how long the ECB can finance its current plans. Italy’s long-term debts are only likely to worsen. Italian politicians must ask themselves if it is worth retaining its country’s eurozone membership for the sake of maintaining fiscal unity across the continent, or whether they should embark on their own path.

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