The coronavirus crunch leaves Europe facing terrible choices

On February 28, I wrote a piece with a premonition: ‘Italy: the crisis that could go viral.’ On March 10, I did a follow-up with a more urgent message: ‘Italy will need a precautionary bailout—a financial firewall—as the coronavirus pushes it to the brink.’ A lifetime has passed since then and the incoming data for Europe and, especially, Italy, is grimmer than anyone could have anticipated. But the framework that guided the economic and financial analysis of my two earlier pieces remains a useful way of tracking this unfolding crisis. These are its four elements:

Besides the widespread and persistent domestic economic shock, as in the great influenza pandemic, the coronavirus crisis is occurring in a highly interconnected global economy, with China and other critical nerve centres of the world trade largely or wholly disabled.

The coronavirus shock is beginning to deflate an enormous credit bubble, which was likely to burst in any case.