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A pedestrian crosses an empty street in Milan, April 4, 2020.ALESSANDRO GRASSANI/The New York Times News Service

When Europe goes into crisis, it always seems to be about Italy. It is the euro zone’s third-largest economy and if Italy fails, the rest of the eternally fragile European project would go down too.

Italy is in severe crisis for the third time in a dozen years. The first came in 2008, when the financial meltdown nearly destroyed Italy’s banks; the second in 2011 and 2012, when the country’s deep recession and soaring sovereign borrowing costs pushed it close to default; the most recent is underway and was triggered by the country’s lockdown early last month to prevent surging COVID-19 cases from overwhelming the healthcare system.

How will Italy save itself – or get saved – this time? We know that Italy will go to the cliff edge one more time, with its GDP expected to fall by 10 per cent or more this year. The question is whether it will keep going and take down the rest of the euro zone with it.

Italy is begging for help. It doesn’t have the financial reserves to fight the pandemic, keep businesses from going bankrupt and revive the economy once the coronavirus monster is slain. But it’s not getting anywhere near the support it wants.

The warnings of Italian prime minister Giuseppe Conte should not be dismissed as mere blackmail attempts to shake down the EU for free money. In several interviews in the past week, he said the COVID-19 crisis had put European Union’s and the euro zone’s future at stake. He’s right. “If we do not seize the opportunity to put new life in the European project, the risk of failure is real,” he told the BBC on Thursday.

Italy’s problem is that the EU countries that could afford to help it, including Germany and Netherlands, are the ones least sympathetic to its plight.

Those countries have a point. Italy’s dire financial state was not the result of the coronavirus crisis. It entered the pandemic with a crushing debt load – its debt to GDP is 135 per cent – along with feeble productivity growth and a fundamentally uncompetitive economy mired in permanent high unemployment. Italy has always had an allergic reaction to reform and its revolving-door governments never have the credibility, drive or imagination to clean up the country’s cumbersome judicial and tax-collection system or dismantle the obscene bureaucracy that stifled efficient business development and job creation.

In short, Italy has been its own worst enemy for decades. This is probably why Mr. Conte’s plea for mutualized debt in the form of “coronabonds” has gone nowhere. The bonds would spread the risk among all 19 euro zone countries, in effect taking advantage of the stellar credit ratings of Germany and the other fiscally prudent northern European economies. The sovereign funding costs of Italy, Spain, Greece and the other struggling economies would fall. But Germany and Netherlands consider mutualized debt as a reward for bad behaviour.

Italy will not go bankrupt tomorrow because the ECB relaunched it quantitative easing program – the mass buying of government bonds – when most of Europe was entering lockdown. The massive QE effort means that Italy will be able to raise debt fairly easily for some time, though it will pay the highest price among the large EU economies to do so.

In a deal announced by the euro zone’s finance ministers this week, Italy and any other hard-hit countries will be able to borrow money from the European Stability Mechanism (ESM), the euro zone’s bailout fund, to fight the coronavirus. But that money will have to be repaid and Italy’s ability to fund an ever expanding debt pile becomes more tenuous by the day.

Italy’s new crisis leaves it with few options. The ECB’s bond-buying program cannot last forever and the ESM loans, if taken in big amounts, would bind the country to potentially long term, Greek-style austerity program. No surprise, then, that leaving the euro is not out of the question. A poll done this month suggested that 53 per cent of Italians are ready to pull the plug on the euro.

There is one possible solution that could buy Italy some time – direct monetary financing by the ECB. It’s an idea being raised by some economists and market strategists, including Marshall Auerback of the Levy Institute.

The process would see the ECB distribute a mass amount of euros on a per capita basis to all euro zone governments. They would, in turn, use the money to reduce their nominal debt loads, creating more room to borrow in order to finance income support, boost their healthcare systems and pay for infrastructure programs. Think of it as helicopter money for national treasuries, not citizens. The Bank of England has just announced a similar initiative; it will directly fund the government over the short-term, allowing the UK treasury to bypass the bond market until the COVID-19 crisis is over.

The beauty of direct monetary financing is that it is non-discriminatory, meaning all euro zone countries would benefit, and it is unlikely to be inflationary “given the current depression-like conditions,” as Mr. Auerback points out.

If Britain can do it, why not the euro zone? Look at the damage little Greece inflicted on the euro zone in the last decade. Italy would be Greece times ten were it to fail. The COVID-19 crisis is not Italy’s fault. Allowing it to go bankrupt would punish all of Europe.

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