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People wearing protective masks walk past the Colosseum in Rome on Feb. 25, 2020.REMO CASILLI/Reuters

If there is a European country that can ill afford the coronavirus outbreak, it is Italy. The European Union’s third-largest economy and Group of Seven member never got its act together after the financial crisis and is on the verge of its fourth recession in a dozen years.

And now a fresh Italian downturn could drag down the rest of the EU with it. The Italian economy, though weak, is still big – bigger than Canada’s – and its supply lines in the largely borderless EU are tightly connected with those of Germany, France, Switzerland and Austria. Germany, which was flatlining even before the COVID-19 virus was detected in China in December, is especially vulnerable.

The outbreak in Italy is the largest outside Asia. On Friday, there were three confirmed cases. By Tuesday, the number was 322, with 11 fatalities.

Worse, there is little sign the virus has been fully contained, even though a dozen towns in northern Italy, most of them near Milan, were placed in lockdown over the weekend. On Tuesday, two cases were reported in Tuscany, in central Italy, and one in Sicily. A hotel in the Canary Islands went into quarantine after one of its guests, an Italian doctor, tested positive for the virus.

Nerves are fraying because Patient Zero, the virus’s first carrier in Italy, has yet to be identified. He or she could still be wandering around, spreading the virus.

The explosion of cases in Italy has freaked out investors across Europe. Monday was a bloodbath in the markets, especially on the Milan bourse, which fell 5.4 per cent, its biggest drop since 2016. The selloff continued Tuesday, though at a slower pace. Milan and other normally industrious and buzzy cities in the wealthy north were turning into ghost towns as public events such as festivals were cancelled and museums, schools and bars closed their doors.

Only a week or two ago, some investment banks, including Goldman Sachs, were telling their clients that the economic hell scenarios might be overblown. They studied the trajectory of SARS, swine flu and other outbreaks and determined that this coronavirus would also politely fade away. In other words, a buying opportunity was about to present itself.

Then came Italy, and all bets that COVID-19 would go down in history as a minor economic blip, to be forgotten by the spring, were suddenly off. In a Tuesday tweet, British economist Andrew Sentance, a former rate-setter at the Bank of England, said, “We never know what will create the next global recession, but the fear created by the coronavirus is a strong candidate.”

Italy has been a laggard among the big EU economies since the financial crisis. Burdened with a debt-to-GDP ratio of 135 per cent, banks laden with non-performing loans, a bad case of deindustrialization, an allergy to economic reform and a string of fragile and ineffective governments, Italy has slogged through three recessions since 2008.

A fourth seemed imminent even before the coronavirus travelled around the world. In the final quarter of 2019, the Italian GDP shrank 0.3 per cent, and many economists think a repeat performance in the first quarter of 2020 is likely, putting the country into technical recession – defined as two successive negative quarters.

The virus could not have been better targeted to muck up the economy. Its epicentre is the region of Lombardy, dominated by Milan, the country’s commercial capital. It also hit the adjacent region of Veneto, whose capital is Venice. Those two regions are responsible for 30 per cent of GDP and are essentially in lockdown.

The regions are prolific exporters of high-value goods, including food, fashion, furniture, industrial robots and medicines. In recent years, Italy has been a goods-and-services export powerhouse – the one sector that has thrived, sparing the wider economy from permanent basket-case status. If the virus hammers exports, Italy will face a heap of economic woes.

Tourism is already in crisis. Who wants to carry a knapsack full of face masks through the empty streets of Northern Italy. Shares of EasyJet and Ryanair, the big discount carriers that count Italy as one of their top destinations, got slaughtered Monday and fell again Tuesday. The contagion hit hotel chains, too.

Italy is virtually powerless to limit the economic damage as the coronavirus spreads. Prime Minister Giuseppe Conte’s tight enforcement of quarantines in the north is the right strategy. Relaxing them early would flirt with disaster; the lockdowns are designed to prevent deaths, not spread fear. His government’s stretched finances mean it will lack the firepower to launch a hefty stimulus package if a recession does come. The European Central Bank is out of ammunition too. Italy’s only option, it appears, is to beg the EU’s budget gnomes to give it some flexibility on its deficit limits.

The World Health Organization is not calling COVID-19 a pandemic – yet. But it’s already turning into an economic pandemic, and Italy is at the centre of it in Europe. Italy’s neighbours are watching with alarm.