What I seem to see is a potentially great leap forward in the European institutions, particularly in the role of the Commission. Thanks to the emergency, ex post it almost seems that Christine Lagarde and Ursula von der Leyen have played a team game, perhaps unknowingly. Thursday the 12th, with her speech that seemed imprudent to many, Lagarde showed what would have happened without EU support: at his words that the ECB would not wear a helmet against the increase in the spread, the markets spiraled into a mad vortex, penalizing a bit all of Europe and especially Piazza Affari with a minus 16%.
And at that point, in addition to the late corrections by the ECB, the support had to come from another institution. In fact, on Friday the 13th, heedless of the cabal, von der Leyen declared that the EU will help all its members, above all Italy which is in the forefront, not lacking budget flexibility and concrete aid to overcome the coronavirus pandemic. In response, the markets toasted with a plus 7% on the Milan Stock Exchange and an appreciable reduction in the spread. Therefore, as in a roller coaster, Lagarde favored the abrupt descent and von der Leyen pushed the (partial) ascent. But is it possible that these facts are clues to an important turning point?
It is known that the European Union is an incomplete union, where 19 of the 27 member countries share the same currency but there is no fiscal or political union. As reported by countless non-partisan observers (e.g. Paul De Grauwe), this situation is highly unstable and generates the possibility that a member country hit by an exogenous negative shock, lacking the ability to create its own money, is forced into the default of its public debt by a speculative attack even if the country's macroeconomic fundamentals do not require it. Italy in the coronavirus emergency, forced to a curfew (hopefully temporary) and to dramatically expand public spending to avoid the desertification of its economy, finds itself in just such a case.
In fact, although coping with the large accumulated public debt is a difficult task, it must be remembered that the wealth of Italians is well above the public debt and, therefore, the macro fundamentals are still stable and orderly solutions to the debt problem are possible. Such orderly solutions are more easily feasible when the context conditions favor them. Therefore, the Head of State did well to ask Europe for responsibility and solidarity for Italy.
The positive response from von der Leyen, who we believe consulted at least with Berlin and Paris before speaking, gave immediate relief. We will have to see, after the words, if and how much the facts will follow. However, this is an important signal. In fact, another known fact (cf. for example the historical studies of Douglas North) is that institutions arise especially when a state is at war or face natural or technological disasters. Well, the coronavirus is just a natural disaster.
Unfortunately it is highly probable that, within a few weeks, the other European countries will be affected by this disaster in a similar way to what Italy was affected by. And then, if the facts follow, a real EU budget will have to be born to deal with crises. If this happens, it will be the first concrete step towards the fiscal union that the European project needs. The path will probably be tortuous, but that first step could already help to remove the discontent of many European citizens from the inconclusive sovereign flattery. And it wouldn't be a trivial matter.
If we compare what, in this hypothesis, could happen in Europe looking across the Atlantic, the scenario would be favorable to the old continent. In fact, thanks to its welfare state and the effective national health services that it ensures for all citizens, Europe would emerge from the crisis with broken ribs (a real demographic and economic drain) but with significant institutional growth. On the other hand, with its private health system limited to only a part of the population the US could emerge from the coronavirus crisis with far more serious consequences.
