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Italy vows to implement 'a massive shock therapy' against the coronavirus

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Key Points
  • Analysts are expecting the Italian economy to contract this year.
  • Berenberg bank is forecasting GDP to fall 1.2% this year, from an earlier forecast of a 0.3% contraction.
  • The latest comments from Prime Minister Giuseppe Conte signaled that further economic stimulus could be underway.
Italy's Prime Minister Giuseppe Conte speaks during a press conference held at Rome's Chigi Palace, following the Ministers cabinet meeting dedicated to the corinavirus crisis, on March 4, 2020.
TIZIANA FABI

Italian Prime Minister Giuseppe Conte vowed Monday to deploy a "massive shock therapy" in the form of economic stimulus as the coronavirus keeps spreading throughout the country and pushes it toward recession.

The country is the most impacted so far in Europe by the virus, which began in China late last year. More than 16 million citizens are under quarantine in Italy's northern industrial heartland, more than 360 people have died and more than 7,000 have tested positive for the virus.

 "We will use a massive shock therapy," Conte told La Repubblica newspaper Monday, according to Reuters.

"To come out of this emergency, we will use all human and economic resources," he added. 

The Italian government pledged last week to spend 7.5 billion euros ($8.5 billion) to reduce the economic impact of the outbreak. However, Conte's latest comments signaled that further economic stimulus could be underway.

The Italian government and the country's central bank are studying a state guarantee scheme that could support banks that relax rules for households and companies, the Italian deputy economy minister said Monday. 

Either way, and whatever the details, it's clear the 'Rubicon of fiscal austerity' has been crossed in Europe
Erik Nielsen
chief economist at UniCredit

In this context, analysts are expecting the Italian economy to contract this year. Berenberg bank is forecasting gross domestic product to fall 1.2% this year, from an earlier forecast of a 0.3% contraction.

"With luck, the Italian response can at least help to slow down the advance of the virus, giving the Italian health system and other countries more time to prepare for a further rise in cases," Berenberg bank said in a note Monday.

"However, beyond the direct impact on activity, the Italian measures, and the possibility that other parts of Europe may move in the same direction in coming weeks, are likely to weigh significantly further on confidence near-term," the bank added.

MILAN, ITALY - MARCH 08: People sit on a bus on March 08, 2020 in Milan, Italy. Prime Minister Giuseppe Conte announced overnight a "national emergency" due to the coronavirus outbreak and imposed quarantines on the Lombardy and Veneto regions, which contain roughly a quarter of the country's population.
Stefania D'Alessandro

An excuse to spend more?

The euro zone, the 19-member region that shares the euro, has traditionally been divided between countries that have high debt piles and want to spend even more and nations that are more fiscally conservative.

"The COVID-19 outbreak therefore constitutes yet another episode in the annual search for reasons to tolerate deviations from fiscal rules, especially in Italy," analysts at the research firm Teneo said in note Thursday.

Euro zone countries are not meant to have government debt piles higher than 60% of their GDPs and public deficit higher than 3%. In Italy, the public debt is at 134% of its GDP.

Speaking Monday, the Italian deputy economy minister vowed to return to fiscal consolidation as soon as the epidemic is over.

Germany, where the government is often criticized for not increasing spending, announced Sunday that it will help companies hit by the virus. The idea is that firms will be able to claim subsidies to help workers on reduced working hours until the end of the year, Reuters reported.

"Either way, and whatever the details, it's clear the 'Rubicon of fiscal austerity' has been crossed in Europe," Erik Nielsen, chief economist at UniCredit, said in an email Sunday.