Just over a decade ago, Athens was plunged into economic catastrophe. Bankrupt but unable to default, contracting but unable to devalue its currency, Greece was transformed into a laboratory for testing how to bail out a euro zone member without crossing any of the bloc’s red lines. The most important of which was the prospect of some degree of fiscal union, meaning that the tax revenues of one member state could go toward stabilizing the economy of another, less healthy (and perhaps less fiscally prudent) member state. Fast-forward to the present and these red lines remain firmly intact despite Greece’s imperfect economic recovery.

But what would happen if there were several Greece debt crises – four or five, perhaps – unfolding at the same time? This is a question that Europe’s leaders might be forced to answer amid the COVID-19 pandemic. And how they choose to do so will mean life or death for the euro.



Though the outlook has improved since the days when the ‘PIGS’ moniker graced headlines worldwide, several euro zone governments remain fiscally compromised and thus unprepared for the economic shocks of COVID-19.

Italy has a debt-to-GDP ratio of 134%. The country’s fiscal and economic challenges have been well covered by this publication.

Portugal has a debt-to-GDP ratio of 123%, though in two bits of good news: the budget was balanced in 2019 and the country is behind the curve relative to some of its European peers, with only 642 cases of COVID-19 as of Tuesday.

France has a debt-to-GDP ratio of roughly 100%, and the government was running a deficit between 2-3% before the outbreak hit. Paris has since indicated that the deficit will widen to at least 4% in 2020 (a conservative estimate given the unknown length of COVID-19 disruptions).

Spain, home to the continent’s second-largest caseload with 17,147 confirmed cases, also has a near-triple digit debt-to-GDP ratio at 98%. The Sanchez government posted a deficit of around 2% of GDP last year, and the government was previously targeting 1.8% in 2020.

Germany remains an outlier with its debt-to-GDP ratio of 61% – the result of an unwritten ‘black zero’ rule that necessitates a balanced budget (a rule that was on the outs even before COVID-19). This leaves Berlin in favorable position to mitigate the pandemic’s impacts vis-à-vis other major euro zone economies.

Italy was first to shut down, and it was followed by Spain, France, and surely Germany soon as well. These societal shutdowns – though absolutely necessary from a public health standpoint – will unleash economic shockwaves that will ripple across the entire euro zone. And as the above fiscal outlooks so clearly illustrate: some countries are better suited to manage the fallout than others.

Now comes the million-dollar question: Will economic (and public health) efforts unfold on a nation-by-nation basis, or will they come from Brussels and adopt a more regional scope. Should the epidemic devolve into every-state-for-themselves, it follows that disillusionment with the European Union – and the euro – will only grow, especially because, much like Greece discovered before, the devastated economies that emerge from the other side of the pandemic will not be able to devalue their currencies (presuming Germany maintains its relative strength within the bloc). On the other hand, bold action from Brussels could carve out some space for continentalism in the hearts of a public that has otherwise taken a broadly nationalist turn over the past five years.

Prospects for a Brussels-led approach are not great thus far.

Italy’s early pleas for help in the form of much-needed medical supplies were roundly ignored by EU member states, a fact that now strikes an uncomfortable contrast to China’s highly publicized offer to send doctors and supplies. Internal movement – the lifeblood of the European project – has also become a casualty of the pandemic, as several member states have closed their internal borders, including Germany. To be fair, much like other governments around the world, Brussels is forced to swiftly adapt to a fluid and unprecedented situation. For example, there was no EU-wide stockpile of medical supplies before the advent of COVID-19. This made it hard for governments to transfer resources to Italy on a bilateral basis and risk popular backlash over their own preparedness back home. This early shortcoming has since been remedied by the European Commission with its creation of a strategic stockpile, but with COVID-19 spread already pronounced throughout the EU, it may be a case of too little too late.

One example of continental action has been on the monetary policy front. The European Central Bank just announced a new “Pandemic Emergency Purchase Programme.” The initiative is essentially a return to quantitative easing: the ECB will purchase some €750-billion-euro worth of sovereign and corporate bonds and, in an echo of Draghi’s famous “whatever it takes,” Christine Lagarde has declared that “there are no limits to our commitment to the euro.” Bond-buying had already been taking place since October 2019, and there are some €2.6 trillion worth of assets already on the ECB’s balance sheet. But this new announcement increases the scope of the program, widens it to include purchases of Greek debt for the first time since the sovereign debt crisis, and also signals a willingness on the part of the ECB to protect the euro at all costs.

There’s only one problem: the COVID-19 pandemic has thus far proven to be an economic problem that defies any easy solution from unconventional monetary policy. Though this rings less true for the euro zone, which has to concern itself with the systemic risks of a run on the debt of peripheral states like Italy and Greece, this is still a battle that will be waged in the real economy, requiring direct assistance to affected workers and businesses.

In other words, the only real way to properly stem the bleed is fiscal stimulus, which remains a taboo subject in the bloc’s most powerful economy: Germany.

The European Commission first dabbled with the idea of fiscal relief during its March 10 meeting, which already feels like a lifetime ago in terms of how the pandemic has evolved since then. Despite France’s calls for a “massive” (fiscal) stimulus response, the meeting convened without any bold agreement on EU assistance outside of the health sector. Unsurprisingly, German officials nixed the idea of a EU-wide approach to stimulus at the meeting, and even expressed skepticism over the notion of temporarily loosening EU budgetary rules.

One tool that could soon be deployed by European leaders is the European Stability Mechanism (ESM), a fund that was set up in the wake of the Greek sovereign debt crisis. The ESM was originally intended as a sort of lender-of-last resort for member states who were locked out of international credit markets, offering low-rate loans to distressed governments. With €410 billion of unused funds, the ESM could play a role in post-COVID stabilization. The ESM normally operates like a miniature IMF, offering stabilization loans in exchange for policy prescriptions to get the non-performing economies back on track. These regulations could be scrapped to allow fewer-strings-attached ‘mini-bailouts’ to euro zone countries, though doing so would be highly politically contentious, at least for now.

As the human and economic cost of COVID-19 mounts across EU member states, fiscal stimulus is an idea that will not be fading away. It is, in a sense, a piece of unfinished business in that the same institutional shortcomings that led to the botched response to the Greek debt crisis remain in-place to this day. Valuable time can and has been purchased by the ECB, most recently in its thunderous return to bond-buying. However, a fundamental economic shock is on its way, and its one that can’t be forestalled by vague pledges of unlimited support. It might just be Italy that eventually poses the question: Is it better to default and tumble out of the euro, or accept Greece-like debt servitude for an indefinite period? How Brussels answers this question – or perhaps even comes up with a more desirable alternative – is of existential importance to the European project.