Greek Business File, April-May 2020, No 125
By Vasilis Trigkas
Declare a World War against the Pandemic and fund it
Global economic sentiment is in sub-zero territory with the end of an 11-year Wall-street bull run and precipitous collapse in stock valuations. Investors are in panic mode as the WHO has now declared the Covid-19 a global pandemic and many analysts foresee a looming corporate debt crisis.
Unlike 2008 when omnipresent securitization and subprime mortgages had infected the basic infrastructure of capital markets leading to a loss of trust, first to interbank lending and then to financial transactions in general, this time the virus has affected expectations about aggregate demand and the resilience of global supply networks. Consequently, if the developed world puts its financial power together and declares a war against the microorganism, the impact of the pandemic will be painful but not detrimental to global economic stability. Unlike 2008, when recovery proved to be U-shaped, this time a V-shaped recovery could be soon achieved if action is decisive. To be sure, concerted action undertaken by the G7 and G20 against the virus will be a war of attrition rather than a battle of annihilation, but when the vaccine is finally readied - in a year or so from now - humanity will be able to deliver a coup de grace and economic sentiment will promptly recover.
If the past is any guide, we now know that global emergency coordination can be extremely effective. At the peak of global uncertainty following the 2008 global financial crisis, the 2009 G20 summit in London provided a powerful signal to the world and reassured global markets. Hence a similar summit today - a teleconference would be more appropriate given the pandemic - to address the economic fallout from the coronavirus pandemic and coordinate cross-border eff orts will be a sine qua non for our eff orts to limit economic damage and avert a precipitous decline of economic sentiment.
But what exactly could the G20 achieve and what would be the most effective policy mix to stabilize the animal spirits of the market? The mix should include a) a typical monetary tools such as helicopter money and debt monetization b) targeted fiscal expansion and c) immediate scientific and development support to developing countries that lack the basic medical infrastructure to deal with the pandemic.
The monetary dimension
On the monetary dimension, it is a well-accepted premise that as monetary policy has been neutralized locked into the liquidity trap of low or even negative interest rates, a disruptive tool is needed to energize aggregate demand and boost investors’ sentiment. This is where “helicopter money” enters the policy equation in a “what-ever-it-takes moment”. The father of monetarism, the great Milton Freedman, was the first to conceive the idea. As he put it, “let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us further suppose that everyone is convinced that this is a unique event which will never be repeated”. When conventional policies of monetary easing have failed, only unconventional shock therapy may deliver and this would indeed be an unprecedented policy solution. The major critique against such an action would be that it distorts economic incentives (think of the moral hazard of free checks) or that it inspires inflationary pressure. But given that this would be a one-off policy to address a rare pandemic in a deflationary environment, none of the critiques is justified. On the other hand, higher income today will provide producers with the expectation that when the vaccine is out a year or so from now then demand will shoot up. This expectation may normalize stock valuations and even stabilize global production networks.
The fiscal dimension
On the fiscal dimension, it is evident that healthcare systems are totally unprepared to absorb the cost of hundreds of thousands of patients hospitalized in intensive care units, let alone the spending on primary resources and personnel. At the same time faltering sales will affect VAT revenues. Higher fiscal expenses and lower budget revenues will challenge the ability of many countries to fund emergency measures and provide citizens with welfare. It is hence necessary that fiscal and monetary authorities coordinate their action to “monetize emergency budget deficits” created by emergency fiscal response to the epidemic. Italy currently stands as a country in need of such support by the ECB, but soon most Eurozone economies may face the same pressing need.
The developing world
Thirdly, the developed economies have both a humane, but also a utilitarian necessity, to support the developing world. Countries in sub-Saharan Africa lack basic healthcare capital and the outbreak of the epidemic will be detrimental to their societies. As the virus floods Africa, the region may become a pool of recurrent contagion for Europe and through Europe for the world. A medical task force for Africa coordinated by the WHO has hence to be put together immediately and all the required financial resources allocated to it by the OECD countries and China without a second thought, including teams of qualified physicians and nurses.
What about Greece?
But what about our homeland, Greece? Make no mistake that the country will be severely affected by the pandemic. As a large share of its national income depends on tourism the pandemic impact can adversely affect major fiscal multipliers and totally crash the Greek national budget. Even before the outbreak, GDP growth for 2020 had been revised downwards from about 2.7% to 2%. With a looming recession, Greece’s commitments to the European Stability Mechanism (ESM) and the ECB loan repayment will be difficult to fulfil. The imperative of a 3.5% primary surplus if followed will necessitate major reductions in public spending and a new round of tax increases. A cyclical fiscal policy amidst a pandemic will push Greece back into a vicious cycle of economic contraction and faltering aggregate demand that has taken the nation a decade since 2009 to cure. Therefore it is an absolute necessity that Greece immediately calls for a European emergency spending mechanism that will provide the required fiscal space for counter cyclical policies and healthcare crisis spending. At the same time the country must build a European coalition in support of what-ever-it-takes policies such as Helicopter money and budget deficit monetization (for expenses related to dealing with the epidemic). Another lost decade for Greece will be detrimental to its survival as a nation and prove beyond any doubt that European solidarity is simply cheap talk.
Europe and the world don’t have a minute to spare. Decisive concerted action and unconventional solutions are required promptly. It has already been 50 years since the American polymath Buckminster Fuller wrote his masterpiece Operating Manual for Spaceship Earth and 30 years since Nasa’s Voyager image of Earth from space, which inspired Carl Sagan’s book Pale Blue Dot: A Vision of the Human Future in Space. As the coronavirus epidemic has swiftly spread across every continent but Antarctica, the metaphor of Earth as a pale blue dot floating in space becomes more captivating. We can all now easily understand Carl Sagan’s words: “Look at that dot. That’s here. That’s home. That’s us.”