Oh dear, Christine! Lagarde admits Eurozone facing ‘massive crisis’ – alarm bells for EU

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Its president Christine Lagarde said the euro economy will shrink by eight to 12 percent because of a “sudden stop of activity” caused by the coronavirus pandemic. The recession will be twice as deep as faster the 2008 financial crisis, she told students as part of a live webinar. Ms Lagard said the bloc faced a “massive economic crisis and one that was literally unheard of in peace time for the damage it is causing”.

The ECB chief said the Frankfurt-based central bank’s prediction of five percent contraction in the Eurozone economy was “already outdated”.

She said it was “very likely” the Eurozone would end up “somewhere in between the medium and severe scenario”.

The “sudden stop of activity that has slowed down the pace of life, the pace of growth, the creation of value… will have lasting effects despite all the measures we are taking”, Ms Lagarde added.

“Of course it will be remedied and we will find ways to move to a new stage and to a new form of economy.

“But we are now going through the immediate consequences on the economic front of that health crisis.”

Ms Lagarde said some countries can expect to emerge from the pandemic in better shape than their neighbours.

She said this would depend on how much “fiscal space” they had to fund their response to the crisis and their reliance on hard-hit industries, such as tourism.

The ECB’s recent biannual financial stability review said huge government debt piles posed a “redenomination risk” to the EU’s single currency.

ECB vice-president Luis de Guindos said: “The increase in public debt comes on top of already higher debt levels in some sovereigns.

“In the medium term we have to pay attention to the fiscal sustainability situation.”

The ECB wants the richest economies to lower the borrowing costs for their poorer neighbours in order to keep the Eurozone afloat.

“We hope that a fiscal response will not only come from national authorities, but that it will come as well from pan-European authorities.

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“We hope that the decisions will be taken by the European Commission and the European Council will go in that direction.”

The 19-country bloc is set to be put under pressure by huge debt piles racked up by the likes of Greece and Italy, as well as France and Spain.

Athens is expected to see its public debt jump to almost 200 percent of GDP and 160 percent in Rome.

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Portugal’s is forecast to hit 130 percent and just below 120 percent for Paris and Madrid.

The ECB said: “The associated increase in public debt levels could also trigger a reassessment of sovereign risk by market participants and reignite pressures on more vulnerable sovereigns.”

It added that Italy must refinance more than 15 percent of its debt in the next year, while for France, Spain, Belgium, Finland and Portugal that figure is more than 10 percent.

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