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Europe must face the coronavirus shock

US, WASHINGTON (NEWS OBSERVATORY) — Europe will have to mobilize its forces and use all the tools at its disposal if the coronavirus epidemic continues to spread there, Fabrizio Pagani, global head of capital markets strategy at Reuters, tells Reuters Muzinich & Co.

Appeared in China in mid-December, the epidemic continues to spread around the world, especially in Europe, with a major focus of contamination in Italy and a number of cases that is increasing in other countries including France.

Italy is by far the most affected in Europe with 148 dead and 3,858 people infected, according to the last official report provided Thursday evening.

The Italian government, which has decided to close schools and universities for two weeks, is preparing to bring the envelope devoted to fighting the epidemic to 5 billion euros.

“The situation is serious,” said Fabrizio Pagani, who was an economic advisor to the Italian government before switching to asset management. “Government measures speak for themselves.”

These measures are currently targeted in order to support the most affected regions and the front-line sectors, starting with tourism, he explains.

“These measures were taken on the margins of the state budget,” he adds. “The Minister of Finance has written to the European Commission asking for additional flexibility on an envelope that would bring the Italian deficit from 2.2% to 2.5%.”

The Italian government, which exceeded its targets last year with a deficit of 1.6% against a projection of 2.2%, is not asking for an exemption from the 3% deficit rule defined by the Stability Pact, according to Fabrizio Pagani.

“The real question everyone is asking is whether the measures planned for the moment will be enough,” says economist Muzinich.

“If the epidemic continues to spread, there will have to be a response at European level,” he said.

“The signals that the Commission is sending indicate that it is willing to be flexible. The situation must really get out of hand, which cannot be excluded, for the Stability Pact to be called into question.”

The eyes of the Italian authorities and of the other countries of the euro zone are turned to the European Central Bank, whose announcements of monetary policy are expected for Thursday.

Governments and markets are wondering if it will follow suit to the US Federal Reserve, which cut rates urgently on Tuesday, a move that was followed by a drop in bond yields and US stock indexes.

“I think the ECB will take a very close look at what happened in the United States after the Fed’s rate cut, knowing that conditions in Europe are very different since the room for maneuver on rates available the ECB are smaller, “argues Fabrizio Pagani.

The Italian economist believes that the Frankfurt institution will focus on targeted measures, possibly with a review of the short-term credit facilities granted to banks (TLTRO).

Several analysts argue that a rate cut is not adapted to respond to a supply and demand shock like the one that the spread of the epidemic risks.

Be that as it may, a monetary response alone is not enough, according to Fabrizio Pagani.

“The coronavirus is an extraordinary and exceptional event, a very black black swan which will flatten all the debates,” he said.

“We will need all the tools, monetary, budgetary, structural and regulatory. All the tools must be put in place and reviewed because what we are experiencing is an event of major magnitude.”

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Article is written and prepared by our foreign editors from different countries around the world – material edited and published by News Observatory staff in our US newsroom.