Even faced with another great depression, wealthier EU countries are resisting action on debt that could ultimately keep the union together
Europes leaders are worried and rightly so. The deadly impact of Covid-19 has resulted in a full-scale health crisis. Evidence of the economic consequences of trying to keep populations safe from coronavirus is starting to emerge. The political ramifications are only starting to be assessed but they could be profound.
The European Union has found itself in some tight spots over the years, but always found a way of muddling through. It survived the financial crisis and will cope with Brexit. But this time things are a lot more serious.
It is not just that Europe is going to suffer a lot of economic pain as a result of the pandemic although the falls in output being pencilled in for this year by the International Monetary Fund would make it the deepest slump since the integration process began in the 1950s.
Nor is it simply that the virus will hit the weakest hardest although that is also the case. The IMF expects the Italian economy to shrink by more than 9% this year and its debt-to-GDP ratio to rise by 20 percentage points to 156%. Those estimates look somewhat optimistic, and there is a real possibility that Italys debt will eventually become unsustainable, even with the assistance of the European Central Bank.
No, the problem is that the EU failed to act collectively at the moment when countries such as Italy badly needed a display of togetherness. Throughout, there has been a lack of co-ordination: countries imposed their own restrictions, imposed their own border controls, and banned the export of much-needed medical supplies. Italy received speedier help from China than from its EU partners, and, not surprisingly, that has left a sour taste. Opposition to the EU in Italy has never been higher.
There was a way the rest of Europe could have shown Italy some love. Backed by France, Spain and seven other eurozone members, Italy proposed that the EU issue coronabonds: debt instruments that would allow all single-currency-using nations to borrow collectively. Effectively, there would be a pooling of risk between those who enjoy strong credit ratings such as Germany and the Netherlands and those with poor credit ratings such as Italy.
Sadly, the Germans and the Dutch have consistently opposed the idea of debt mutualisation, despite the parlous state of Italys public finances and its combustible politics. And one big difference between this and previous crises is that populist parties are now much more powerful and there is a real possibility of Matteo Salvini surfing a wave of Euroscepticism and coming to power in Italy.
Some European politicians get it. Emmanuel Macron told the Financial Times last week that the EU had no choice but to issue common debt with a common guarantee. The alternative, the French president added, was the collapse of the EU as a political project. It is not often that Brussels apologises for anything, but Ursula von der Leyen, the president of the European commission, has sent a heartfelt apology to Italy on the EUs behalf for letting the country down.
This is crunch time for the EU. In the 1930s, Franklin Roosevelt used the federal budget to deliver help under the New Deal to the parts of the US suffering most from the Great Depression.
The EU currently lacks the ability to act like FDR did. It has only a tiny budget, no single finance minister and no way of issuing collective debt. These are the toughest times for Europe since the 1930s. It has to decide whether it is going to press ahead with integration or revert to a loose collection of nation states.
After lockdown, will people want to fly again?
The coronavirus lockdown has underlined the fragility of aviation and its importance. Heathrow has abandoned not just its planned third runway, but one of its existing pair yet brings in essential medical supplies that the UK cannot provide for itself. At deserted Stansted, flights full of Romanian workers arrive to harvest the fruit that Britain cannot pick for itself.
Meanwhile, the International Air Transport Association has updated, by another string of dizzying zeroes, the amount of revenues now 251bn that airlines will forgo in 2020. Bankruptcies are all but inevitable for the smaller players.
However, the big two budget European carriers, easyJet and Ryanair, still see a future ahead albeit with contrasting conclusions. Ryanairs Michael OLeary, having predicted that coronavirus would be forgotten by Easter, has not proved himself quite the prophet of late. Nevertheless, he foresees the return of pre-crisis levels of air travel, with fares slashed to fuel a rush.
His counterpart at easyJet, Johan Lundgren, is more pessimistic and talks of social distancing on half-empty planes, and a slow return to growth. Nevertheless, both are believers in there being pent-up demand for air travel.
That may exist: although for most Britons, having had three more weeks of lockdown confirmed, even a trip to the pub or a neighbours house would be an adventure right now. Ryanair has the cash to start a fare war and survive, but its bullishness should be tempered by the recollection that it was first of all public fear, not government restrictions, that made demand evaporate.
Even if lockdowns are eased radically by the summer, will the airlines customers really be financially and mentally ready to jet off for a week in the sun? Investors never mind any ministers tempted to stake taxpayer money on eventual bailouts should surely think twice.
Pandemic changes the entertainment game for Netflix
The last decade has already spawned a new corporate world order, with the technology giants at its head. Last week saw another symbolic moment, as the streaming giant Netflix overtook the mighty oil company ExxonMobil by market value, after reaching $196bn (157bn).
As recently as 2013, Exxon knocked Apple off the top spot as the worlds largest company by market value. Yet its stock price had gone into reverse even before the coronavirus crisis took hold. Amid a slump in the oil market, shares are back at levels not seen since 2004. Oil companies will hang around for a while yet (for too long, in all likelihood), but there is an air of the ancien regime hanging around even majors such as Exxon.
The increase in Netflixs market cap has been truly worthy of a disruptor from about $9bn at the start of 2013 to nearly $150bn at the start of 2020.
Yet it too had been looking squeezed in recent months. With Disney+ and Apple TV+ entering the streaming market, along with Amazon Prime continuing to grow, the battle for paying subscribers was entering a tougher phase. That left Netflix looking overextended as it tried to build up its own library of original content with $26.4bn in liabilities on its balance sheet.
The pandemic has changed the game and appears to have deferred a crunch, possibly forever. Lockdowns have delivered Netflix a captive audience on a global scale, boosting its share price by almost a third during 2020. As a consequence, big spending on Adam Sandler films suddenly seems less of a risk (although sceptics remain 3.6% of Netflixs shares are still being borrowed for short selling, in a bet on prices falling).
The revenue boost from all those new users will be welcomed and may even help the company eat into its debt pile. But it seems clear that investors are betting the crisis has already ushered in a new age for entertainment consumption.
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