The COVID-19 lockdown is a major aggregate shock on the world economy. Because it is aggregate, it will not be easily mitigated through fiscal transfers across citizens and countries. Intertemporal consumption reallocations, i.e., a sizeable fall in the world aggregate savings appears to be the only tool. This will lead to a surge in public debt and, quite likely, to a rise in real interest rates. Given the size of the Euro Area economy and its large current account balance, a large fiscal expansion is feasible, but not all countries have the same fiscal capacity and ability to raise funds at reasonable costs. This heterogeneity may trigger a financial meItdown, like the one we witnessed in 2011. A flight to safety may raise interest rate spreads and limit the ability to contain the effects of the shock in countries where public debt is already large, banks are riskier and growth prospects less promising. The bottom line is that intertemporal risk sharing may be limited and the COVID-19 lockdown, even if short lived, could trigger a long-lasting recession.

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