The European Union has been facing financial pressure long before the coronavirus pandemic, with several key members of the eurozone struggling to recover fully from the 2008 global financial crisis and consequent debt crisis. The need to shut down most business in countries like Italy and Spain to slow the spread of the virus sparked fears of massive economic shocks throughout the eurozone. Former British MEP Ben Habib warned the EU is now on the verge of a “massive economic catastrophe” due to a key flaw in the workings of the European Central Bank (ECB).
Speaking to Nigel Farage during his new webcast, At Home with the Brexit Party, Mr Habib said: “My fears for the eurozone now are really a magnification of what my fears have always been.
“And it boils down to this – the truth of the matter is that the ECB is not a central bank in the sense that it doesn’t act as a mechanism by which member states can ensure there are zero risks of them defaulting on their debt.
“If you look at the bank of England, for example, together with the Government of the United Kingdom, there’s no way that we can default on our guilds because we would simply print enough money to ensure we honour our promises.
“But that’s not the case in the eurozone.”
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Mr Habib continued: “The ECB can’t do that and so what that means, practically, is that whilst Italy, Greece, Spain and Portugal have to do a lot of stimuli to buoy their economies to get through this economic lockdown, they can’t rely on the ECB to bail them out.
“In effect, their debt level is going to go from very high – I think Italy is about 135 percent Government debt to GDP ratio, Greece is around 180 percent, Spain is similarly well over 100 percent.
“France as well is in the crosshairs of this problem, their debt to GDP ratio of 100 percent.
“As the debt level rises, they can’t count on the ECB’s support to bail them out which means they are facing a massive economic catastrophe in the eurozone.”
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In March, ECB boss Christine Lagarde announced a new £750 billion Pandemic Emergency Purchase Programme (PEPP) as part of its measures to support the eurozone through the crisis.
The PEPPE will allow the central bank to acquire private and public securities in a bid to counter the risks the coronavirus pandemic has created for the 19 members of the eurozone.
The ECB however has no precedent of actively bailing out eurozone members as European Union rules prevent the bank from offering help unless a country agrees to an EU rescue programme – a so-called bailout.
Eurozone members agreed to a common £470 billion rescue programme at the last meeting of Eurogroup finance ministers in March.
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The programme also helped bridge a gap between northern and southern European states after the Netherlands and Germany expressed opposition to supporting struggling eurozone countries.
The agreement however did not fully reconcile Eurogroup countries and national leaders will meet via video conference on Thursday for further discussions.
The deal also authorised nearly unconditional use of European Stability Mechanism (ESM) bailout fund for loans to governments, a scheme to subsidise wages to allow firms to cut working hours rather than jobs, and a plan for the European Investment Bank to step up lending to companies.
However, eurozone finance ministers postponed answering the question of how to pay for a temporary recovery fund for Europe after several countries asked for the issuing of common debt to tackle the risks of the pandemic.
The issue of the eurobond has been a leading stumbling bloc for the eurozone, putting a camp of financially ailing southern states led by Italy facing off the Netherlands as the bulwark of the fiscally conservative north.
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