As the Covid-19 pandemic seems to have reached its peak and lock-downs are being relaxed around the world – especially in Europe that is Greece’s own environment – a bird’s-eye approach to the health-policy issues raised and to the economic consequences is useful for every country. As Greece is going its way, we have secured the help of Elias Papaioannou of the London Business School, who corralled the contribution of two of his colleagues at the LBS to address the issue.
Here are some of their inputs to the main questions raised. Their full contributions will run at the forthcoming issue of Business File.
First, the health dimension –based on the economic analysis of health policies (by Andrea Galeotti and Paolo Surico)
What have been so far the best policies on the health-policy front? How far are the lock-downs implemented inevitable?
For European countries, it seems that it was inevitable to enter a strict lockdown as countries were not prepared for this epidemic. When governments started to act the virus already spread substantially in the population. At the same time hospital capacities were limited. The only alternative was a strict lockdown. There are differences, like Sweden, but those cases are mainly dictated by a much less dense population and other aspects that may allow Sweden to act differently.
Despite lockdown was inevitable, it was also clear that the main point of the lockdown was to buy out time in order to get ready for the second phase: the reopening. So, to us, the best way to evaluate the “best policy” across countries is to see the way in which different countries used this time to prepare for the exit strategy.
In this sense, we can see that Germany has, since the beginning, ramped up testing, and this allowed to direct tests not only to symptomatic individuals, but also to asymptomatic individuals. This has allowed Germany to have a much more comprehensive picture of how the virus has diffused in the population, and to stop the spreading much faster. Having good and reliable information is what it allows to make choices in the exit strategies which are more effective.
Italy provides a very different examples.
Despite testing is now more pervasive, there is a clear lack of coordination across different regions, and there is not clarity on what is the strategy that Italy will use to keep the infection low. The only strategy seems to keep the lockdown as much as possible. It is difficult to say what in happening in UK, because at the moment there is not much information about what is guiding policies and what are the principles behind what and when to reopen.
Looking at practices followed can we really say that a test-test-test policy is the best approach? And is there consensus in the scientific community about the way testing should take place? For example, shall it be focused on random?
In an ideal world, we would have a test that each of us can take in the morning and that is fully reliable. That would be (almost) as effective as a vaccine. But we have neither. Tests are a scarce resource, there are different types of tests that provides different information, tests are not fully reliable and the outcome of a test may inform the policy maker for different objectives. Each of this element determines the best way to utilise a portfolio of tests. So, there is not a universal optimal way to test. But, for a given problem, we can develop what is the best way to use the available tests.
For example, if the objective is to learn about the stock of infection: the number of people that have been infected since the beginning of the epidemic and possible correlations with characteristics like age, sex and alike, then one should use serological tests because those will reveal the presence of antibodies. Ideally you would test the all population. But since that is unfeasible, you want to test in a way that you can use the collected data to do inference in the all population. For this case, a properly constructed representative sample of the population seems to be the best alternative.
If, in contrast, you use testing for contact tracing. Then, testing should be very much different from random. You want to test people that have been closed to people that have been found infected. This sample of people you want to test is almost the opposite of a random sample. Again, different objectives, will impose different strategies.
Now, one more directly economic- based approach to the pandemic (by Elias Papaioannou)
We have got to know the Covid-19 disease as a (WHO-declared) pandemic. But isn’t it rather a different case at each country? Can you briefly tell us what is happening to the World Economy?
And what about Europe? Is there a new North/South divide?
COVID-19 was a shock that initially hit emerging economies (China), industrial countries (Italy and South Korea) and frontier economies (Iran). And it quickly spread around the world, without much discrimination. Some advanced economies responded wisely with lockdowns and were quick to test, like New Zeeland and Denmark, others failed, most notably the United States and the United Kingdom, which have failed big time in their early response.
However, when we think about the economics of the pandemic, the situation is quite different. Due to countries considerable gaps in fiscal space, the credibility of monetary authorities, and institutional quality, the common shock will, sadly, yield divergent economic trajectories.
Would you look for First world/Third world gap?
Take the United States, which is the extreme case. The Federal Reserve has implemented, swiftly and decisively, various quantitative easing programs assisting crucially the economy; support for banks, assisting big corporates to roll over their debt, funding states, indirectly helping small and medium sized enterprises and many more. At the same time, the fiscal stimulus package has been both big and far-reaching. Though targeting should have been better, assisting workers and small business and entrepreneurs rather than big corporates, the US’s unique position in the international financial system allows her to borrow very cheaply and assist the economy.
The Eurozone is closer to the US, though there are no negligible asymmetries. Lets start with the Eurozone. The European Central Bank responded aggressively, helping both European banks and governments. Banks can access much-needed liquidity and hopefully they will soon be able to resume their crucial function, lend businesses and households, fund innovative entrepreneurs and corporates. The ECB has helped crucially governments that turn into the markets to fund expansionary fiscal programs.
On the fiscal policy side there are both good and less-good –I wouldn’t say bad- news. First, the countries of the core, most notably Germany, have announced and started implementing sizable fiscal stimulus programs. These programs are well-designed targeting workers, small and large businesses and households. While they are primarily targeting the domestic economy, there are going to be positive spill-overs to neighbouring countries and the periphery. Second, the Eurogroup and the ESM (European Stability Mechanism) have taken some steps to assist Italy, Spain, and other countries that have suffered the most from the health crisis. For example the relaxation of the tight fiscal targets is a sound measure and so is the financial assistance, which though quite limited is a step in the right direction.
The big problem in Europe is that countries capacity to cope with the health and the economic crisis differs wildly. For example, Germany, Austria, and the Netherlands have ample fiscal space that allows them to protect workers and firms and invest heavily in the health system. Nonetheless, this is not the case in the European South, as Italy, Portugal, and Greece have high debt levels that places constraints in their effort to protect workers and firms.
I am optimistic that EU governments and policy institutions will soon reach a reasonable compromise. That’s the good news. The bad news is that on the marketing side the EU has performed poorly. In such a severe health crisis, European citizens expected more solidarity to Italy and Spain, more empathy, and more assistance.
Andrea Galeotti is Professor of Economics at the London Business School, an expert in microeconomics, industrial organization and game theory. His research focuses on the economics of networks. His work has contributed to understanding how social and technological networks form, how information and ideas diﬀuse, and how ﬁrms can improve their performance by incorporating networks in their strategies. He is the holder of the Leverhulme Prize 2011 for the best economist in the U.K. under the age of 35 and he is a recipient of a European Research Starting Grant in 2011 and a European Research Consolidator Grant in 2017. Professor Galeotti served as co-editor of The Economic Journal and, as of January 2019, is co-editor of The Review of Economic Studies.
Paolo Surico is Professor of Economics at London Business School. worked as Research Advisor of the External Members of the Monetary Policy Committee of the Bank of England until 2009, before joining the economics department at London Business School. He is a Research Affiliate at the Centre for Economic Policy Research (CEPR, London) and academic consultant at the Bank of England. He published regularly in leading international academic journals and has worked as external consultant for the European Central Bank.
Elias Papaioannou is Professor of Economics at the London Business School and a research fellow of the CEPR (Centre for Economic Policy Research). He serves also as the academic co-director of LBS Wheeler Institute for Business and Development. During the current academic year, Elias serves at the Hal Varian Visiting Professor at MIT's Department of Economics. . After the completion of his doctorate in 2005, he worked for two years at the Financial Research Division of the European Central Bank. His research covers international finance, political economy, law and finance, and growth and development. He was the inaugural 2013 European Investment Bank Young Economist laureate. His research has been recognized with the 2005 Young Economist Award by the European Economic Association and the 2008 Austin Robinson memorial prize by the Royal Economic Association for the best paper published in the Economic Journal. In 2018 Elias received a major European Research Council (ERC) consolidator grant for research on African political economy.