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A man walks in the usualy crowded Fesch street in Ajaccio, on the French Mediterranean island of Corsica, on Oct. 30, 2020, on the first day of a new national lockdown in France aimed at curbing the spread of COVID-19.PASCAL POCHARD-CASABIANCA/AFP/Getty Images

What a bittersweet day Friday was.

In the morning, we learned that the European economic rebound in the third quarter was stellar. Gross domestic product rose 12.1 per cent in the European Union. It was performing even better than the United States, where GDP rose 7.4 per cent.

Then came the bad news. The GDP rise still left output lower than it was before the pandemic, and as soon as the numbers came out economists tripped over themselves to warn that a double-dip recession was coming. ING’s economists said “a new downturn is almost certainly upon us … this is the reality of a COVID economy.”

In the summer, we were under the illusion that the pandemic beast had been tamed. The COVID-19 daily death count had dropped into single digits in some countries and a few politicians dared to suggest that the virus had been crushed. Go to the beach, hit the pubs and dance under the stars, they advised. All will be fine.

It might have been, except too many of us got sloppy on physical distancing and mask use, and testing and tracing systems were nowhere near as robust as advertised. They failed to prevent the resurgence that is now tearing countries apart again. France, Germany and Ireland are back in lockdown. Italy and Belgium are sure to follow.

A health crisis triggered a recession. Now it’s triggering an economic calamity.

As health authorities scramble to prevent hospitals from becoming overwhelmed once again, finance ministers and central bankers are wondering where they will find the money to keep unemployment from soaring and prevent the wholesale destruction of small and medium-sized business. And what if an economic crisis transforms into a financial crisis? That scenario is no longer unfathomable despite the massive recapitalization of banks after the 2008 financial meltdown. The ultimate economic challenge is not past, it lies ahead.

Europe is running out of firepower to keep the lights on as GDP suddenly goes into reverse again. The European Central Bank pumped lavish amounts of liquidity into the market in the spring, and ECB boss Christine Lagarde virtually promised this week that another round of stimulus is coming as the economic deterioration picks up momentum. “We’re not going to just stand still,” she told the media.

But the ECB can’t pay the salaries of workers who lost their jobs, provide zero-interest loans to businesses on the brink or give assistance to university students who can’t find work in restaurants. That’s up to governments. They have opened the spigots in a valiant effort to prevent economic collapse, but will run out of spending power at some point.

Already, debt-to-GDP ratios are soaring. Fitch, a ratings agency, this month forecast that Italy’s will hit 160 per cent by the end of this year, one of the highest in the world, compared with 135 per cent before the pandemic. Italy and other countries do not yet face sovereign debt crises – they can borrow at next to nothing – but that could change if investors determine that a combination of ever-higher debt and low or negative growth is a receipt for disaster, as Greece learned in the past decade.

The new EU Recovery Fund will certainly help, but it is too small to rebuild shattered economies. The fund will see the European Commission borrow €750-billion in the financial markets. Of that amount, about €390-billion will be sent to governments as grants, the rest as loans. Governments will lunge for the grants, but the money-for-nothing is tiny next to the size of the EU economy. And the disbursements won’t start until mid-2021, while the loot is needed now.

These sobering realities will soon force governments into a corner. They had not expected a COVID-19 resurgence of such ferocious strength. To help companies and their employees until the vaccines are ready, they will have to nationalize some industries in whole or in part. That process is already under way – the German government took a 20-per-cent stake in Lufthansa. Governments might also commandeer companies to produce and distribute essential health care items such as ventilators and COVID-19 test kits, as they did in the Second World War, when factories producing consumer goods were converted into munitions plants.

Germany, the one big European economy that has weathered the pandemic storm fairly well, thanks to heavy investment in testing and tracing, alone has the financial might to mount a rescue plan if the second round of lockdowns turns into an economic wrecking machine. The question: What would Germany want in return?

If Germany demands austerity, as it did after the financial crisis, all bets are off for the European project, which almost fell apart a decade ago when bailed-out governments were forced to slash spending in exchange for loans. But if Germany instead demands a fiscal union, including common debt, the EU could be recast in a more financially sustainable format.

The early arrival of an effective vaccine might let Germany off the hook. The looming new recessions, perhaps depressions, suggest otherwise.

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