The Covid-19 recession might hit the euro area particularly hard, here is why. Fighting Covid-19 requires a massive rise in public spending. How can governments finance it? In the US, as argued by @paulkrugman, the solution is a rise in public debt.
Due to the lockdown, households are cutting consumption and increasing savings, making borrowing particularly cheap for the US government. But this logic might not apply to those euro area countries, such as Italy or Spain, most hit by Covid-19.
The reason is that capital is extremely mobile among countries sharing a common currency. Italian or Spanish households might easily choose to channel their higher savings toward, for instance, German bunds - without having to bear any exchange rate risk. Financing the fight
against Covid-19 with public debt might then not be an option for Italy or Spain. What about taxes on capital or wealth? Again, international capital mobility poses a challenge. The prospect of higher taxes might trigger sharp capital flights toward other euro area countries.
Worse yet, capital flights might be driven purely by animal spirits. Imagine that investors become pessimistic and anticipate high future taxes. Capital will fly abroad, reducing the national tax base, forcing the government to hike the tax rate, validating initial expectations.
If capital mobility is high, as in the euro area, this mechanism can trigger capital flights in a country whose fundamentals are sound. Capital flights might then greatly exacerbate the Covid-19 recession in worst-hit euro area countries.
How to avoid this scary outcome? One option is to set up a transfer system under a European recovery fund (ft.com/content/69b90e…, @MESandbu). Implementing a euro area-wide solidarity levy (@DanielGrosCEPS) or wealth tax (@landais_camille, @gabriel_zucman) is another option.
These interventions reduce the asymmetry in the fiscal resources that euro area countries need to mobilize to fight Covid-19, and mitigate the risk that the recession in worst hit countries is compounded by capital flights. Better yet, by ruling out capital flights driven by
animal spirits, these policies might create fiscal space in worst-hit countries, and so reduce their need of external assistance. If you got up to here, you might be interested in a macro model that captures these effects.
If so, you can have a look at my paper on Monetary Union and Financial Integration crei.cat/wp-content/upl… 
