All eyes will be on the southern European state to see if the ECB’s measures will prevent a health emergency becoming an economic one

If there were any doubts as to how seriously European officials are treating the Covid-19 emergency, the Italian prime minister Giuseppe Conte’s reference to this being his country’s “darkest hour” should help dispel them. Italy is the European country currently most affected by the virus, with the highest number of cases and fatalities. It might be the first in the region to be badly hit, but it almost certainly won’t be the last.

Whether even more aggressive or creative action may be required in the coming weeks or months, no one knows. The initial reaction to the measures announced by the European Central Bank was mixed. But unlike the sovereign debt crisis – which first affected Greece and then Italy, Spain and Portugal – there is no political or economic divide between the needs of the core and the periphery of Europe in the face of the coronavirus challenge.

GDP declines for both Q1 and Q2 could prove to be twice as bad as anything seen during the 2008 financial crisis

While Italy’s expenditure on healthcare as a share of GDP is in line with most of its European neighbours, it stands apart from the rest of the euro area on its poor economic fundamentals. Italy’s GDP is only 5% higher than it was in 2000; in France it is 29%. Unemployment and government debt are also high relative to the rest of the euro area, while levels of government investment – a decade ago on par with the rest of the euro area and the UK – are now significantly lower.

Unsurprisingly, therefore, on a number of market-relevant variables the Italian banking system registers toward the weak end of the European spectrum: adversely hit by a high proportion of non-performing loans (7.2% against a European average of 2.9%, according to the European Banking Authority), little demand for new business and historically low interest rates and margins.

As Italy and much of the region probably now faces a technical recession, all eyes are on whether the fiscal and monetary measures being introduced will prevent a health emergency from becoming an economic emergency, with companies and households unable to pay their debts.

Precisely how bad the Italian and euro area economic data will turn out to be over the first half of this year is hard to estimate. But if Italian output declined by, say, 20% this month, flatlined next month, and then the economy started to bounce back over the course of May and June, GDP declines for both the first and second quarters will prove to be twice as bad as anything seen during even the lowest points of the 2008 financial crisis.

With other parts of Europe now seeing school closures, parents staying at home to look after their children, restaurants and other retailers shutting their doors and consumer spending on non-essential goods and services being put on hold, other countries will undoubtedly see a similar situation unfold. The only question is one of timing.

Another concern is that even if the immediate crisis ends up being contained over the coming months, the aftershocks could linger well beyond that, as the summer tourism season is wiped out and businesses lose a huge portion of their annual revenues. In southern Europe, that could mean the banks face another wave of loan defaults, national governments take in much lower than anticipated tax revenues, and the markets then question the sustainability of government finances and whether the weakest banks across Europe can get by without having to raise additional capital.

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Faced with these risks, European policymakers are stepping up their response. Fiscal policy, as expected, is leading the way, with the governments looking at a variety of measures, including postponing tax collection, allowing households and businesses to delay mortgage and loan repayments, giving banks the regulatory leeway to allow customers to postpone debt interest payments, helping the self-employed with cash payments, and governments underwriting emergency loans to small and medium-sized enterprises.

Similarly, the ECB responded last week by expanding the size of its quantitative easing programme and by providing banks with the ability to borrow money at even lower rates. The hope is that these actions are transmitted into the real economy, lowering borrowing costs for governments, households and companies, and will lay the foundations for a stronger recovery once the worst of the epidemic is behind us and economies start to claw back whatever output will be lost over the coming months.

“Whatever it takes” was Mario Draghi’s powerful but highly controversial rallying cry in 2012, despised by many across the region who thought the ECB was overstepping its mark in keeping the euro area economies afloat. In the current crisis, however, every government and central bank is committed to this maxim – and Europe is stronger for it.

• Marchel Alexandrovich is senior European economist at the global investment banking firm Jefferies