So far, we have looked at the impact of the virus on the economy and the consumer as well as what we should expect in the coming months as we approach a potential recovery. This week the conversation was focused on what we have done in response to the virus and what measures have been taken by the governments to mitigate the long-term impact that is caused by the downturn.
Coronavirus and the Economic Policy Response, London Business School
Linda Yueh, Adjunct Professor of Economics
Lucian Cernat, Chief Trade Economist at the European Commission
Linda explained to us that the support of households, businesses, and the financial sector involve a mix of liquidity and solvency. For households they can suspend mortgage payments, student loans and allow tax to be deferred. Whereas for solvency measures such as unemployment insurance can be instituted.
Out of all decisions, spending on public health is the most important everywhere. The pandemic is causing a health crisis which means that this will have to be a priority. After this we need to look at how do you help individual people and the financial sector. We have to split the sections into cash flow issues and problems with solvency since we know so little about COVID19. This is done to cover as many problems that could potentially arise in the system. Different countries have adopted different methods that are listed above. It is important to focus on the economy country by country to see which of these measures are necessary. The biggest issue world-wide is the immediate economic shock caused by the outbreak. An example of this is the sudden spike in the unemployment levels in the US which in one week in March saw 6.6m initial claims. This is a factor that has to be fixed as it can affect the out turn of the economy in the long run. The Great Corona Crisis (GCC) has had a much bigger economic shock than the Great Financial Crisis (GFC).
Why has some countries used some methods but to others?
There is a layer of policy making in EU. In this event the health policy has become a key factor. The EU has had to focus on adapting the existing instruments to current problems. An example of this is having those out of jobs to be eligible for retraining, refinancing so that they can continue to contribute to the economy. This can be achieved by the combination of EU solidarity and the ability of allocated funds of common budget. During GFC there wasn’t a job retention scheme, but now the labour markets have been seen to be flexible. There’s a significant difference between the US and the UK because of stimulus checks and the federal nature of the US and cultural reasons. The US is already at the 4th phase of their support act. They might have an examination of the importance of keeping people in jobs. In EM, China hasn’t done much supporting people because they have a very flexible labour market. They’re much more focused on supporting the businesses. India has big challenge of the informal sector. They seem to tend toward cash transfer and support.
The amount of asset holdings through QE has increase a lot and is much more than what we had during the GFC. We don’t want the businesses to go under during a short-term economic shock. If the virus isn’t contained, when we open up again the global economy has to be looked at. The Emerging Markets (EM) are usually affected and can enter a downturn if the Developed Markets (DM) are in a recession. Is a high debt a problem? It is very important to look at the structure of the public debt time wise. Who are your creditors? If you have high debt but your citizens believe in the government, then even higher levels of debt can be beneficial. Therefore, such countries can sustain higher levels of debt. Developed countries such as the US and the UK will have high levels of debt to allow for a V shaped recovery which is more favourable than lower debt levels but an elongated slow growth or even a long-lasting recession.
Based on the broad sterling effective exchange rate, which is the widest measure of the pound, sterling has been one of the biggest barometers of confidence and concern during this issue. All countries are undertaking a huge amount of debt, but they need to spend more and thus the debt picture is going to get worse. Extraordinary range of government actions seen to date are centred on, spending on public health, supporting people, keeping viable businesses afloat, international financial institutions stabilising the global economy and implications for government debt and also the shape of the economic recovery. Avoiding hysteresis which is when a short-term rise in unemployment damages the potential growth of the economy and transforms a short-term shock into one having longer term economic impact.
What is the importance of policy coordination?
There is a mixed bag of options. There is leery evidence that the government understands the need for a coordinated response but there are signs that we could do better. There should be a network to monitor all protectionist measures. EU commission are pushing hard for one measure for virus containment and economic sense. Launch of the joint recruitment initiative is an example. Instead all member of states compete for ventilators, they join in and produce and distribute where there is market for it so that there is transparency to do more with less. We have to focus on the health side of the problem as the virus can cross borders. There’s going to be waves of infections coming. Economic policy responses are effective: fed has expanded the FX swap lines which allows liquidity for other countries to allow cheaper dollar. US has essentially become the global bank of last resort. Given travel restrictions and supply chain effects there’s already more localised supply chains due to consumer preferences and having things locally. 3D printing allows a lot more production locally which is rebalancing and diversifying of supply chains. There’s going to be more of this PPE equipment as businesses have to think about their supply chain impact. EU is the largest contributor to aid. During a crisis speed is important, countries can respond faster themselves than others. EM has high import tariffs which can be a problem for them. Same in EU with PPE issue and having this reduce can improve the problems.
Lucian tells us that crises can be arrested only by attacking their source and mitigate their economic consequences. In the midst of the Covid-19 pandemic, the focus must be on virus containment. That will require creative and expeditious actions, both on public health and economic recovery. This is a very high responsibility of member of states. The graph below shows the measure the economic sentiment across time. New record low for this in Europe and has already surpassed GFC. There’s a critical need to for government to intervene.
The European Commission is ready to frontload billion euros to help all EU Member states. Corona-relevant health expenditure in any part of the Member States includes Hospital equipment such as inhalators and masks, support to small and medium-sized enterprises (SMEs) working capital, short-term employment schemes. There is a crisis in the health system and therefore liquidity is the problem and the necessary equipment everyone needs. SMEs are the ones who are the most affected by the short-term crisis. Short term employment schemes are important to address this problem.
The European Solidarity Fund (ESF), has been already highly affective, in 2002 it has deployed 5bn Euros successfully to those that required it. The ESF covers health emergency now making 800m available for all member states as aid. Italy requested assistance for this fund and the money is on its way.
The Support to mitigate Unemployment Risks in an Emergency (SURE) is a new temporary EU scheme to tackle the unemployment consequences of the coronavirus pandemic. The SURE targeted at protecting people’s jobs, providing temporary financial support and ensures solidarity between members of states. Up to €100 billion made available to Member States for their short-time work schemes. For example, over 4 million EU jobs at risk from the projected covid19-related loss in EU exports. Those people who are at risk of unemployed who can be helped with schemes the most. There’s also a strong need for short term work scheme support to help companies avoid bankruptcy. This is why there’s a fast model in place. There’s 100bn available for this function as 4m+ EU jobs are at risk just from the global supply chain disruption.
The WTO secretariat forecasted a reduction in global trade between 13 % and 32%. For 2020, DG TRADE’s Chief Economist team predicted a COVID19-related decline of: – 9.2% in extra-EU27 exports and – 8.8% in extra-EU27 imports. This amounts to a loss of 285 billion EUR in EU exports and 240 billion EUR in extra-EU imports. Knowing that 1 billion euros of EU exports support on average around 14’000 jobs: over 4 million EU jobs are at risk.
The vulnerabilities exposed by the crisis imply that we are at a defining moment for globalization. The shock is not symmetrical across sectors and countries. There is high risk of geo-political short-termism, the pressure to re-shore value chains. Trade can accelerate the post-Covid19 global economic recovery but requires a global coordinated policy method. Could look at deglobalisation scenarios. The shock is not symmetrical, some sectorised countries area affected differently. Trade can accelerate the recovery. We looked at different support methods for supporting households and corporates. Different economies have used different techniques. US: tax reduction and support bills for businesses. UK: furlough for those employed but can’t work.
Moral hazard problem, what’s the view on it? Bigger issue around bailing out businesses?
In a crisis moral hazard takes the back seat, it is always an issue. There was concern over that in GFC, during a crisis you have to be thorough about it in design. There’s always going to be fraud and corruption. Those borrowing are told to spend freely and hold on to the receipts as they will be audited down the road. If the schemes are well calibrated there’s a bit of multi government level to check this and give feedback and give the economic indicators. European level is interested the percentage of the funds is well spend and ensure scrutiny.
EM debt forgiveness
In Africa there’s not enough ventilators underdeveloped health systems. They need technical assistance and debt forgiveness. They are necessary as the pandemic will never be contained globally. It’s also a question about how they might combat other diseases. Debt forgiveness or giving more aid has to be considered. To come out of it, supply chain localisation cuts off ways in which EM could grow which can be problem. Progress might be hampered.
Opportunity for EU to get more ESG?
There is a way forward, we can use the crisis to remain on path with the climate change. There’s a positive side of the crisis innovation cropping, new ways of doing things which is more sustainable. The way we adjusted to crisis is very important.
Wave like recovery. Periods of restrictiveness and loosening. Not like other waves, Spanish flu came in 4 waves. But we can shape those waves by investing in tech can allow different working which boost productivity. There are ways to soften these wavers and make it a steady recovery. Spend to invest in green initiatives that pay off in the long term, this needs to support the private investment. Not enough projects before but now hopefully this will boost GDP.
Digital technology can boost economies, 3D printing start-ups have helped hospitals and robotics. Allows social distancing and productivity.