We may have to prepare for a longer coronavirus crisis
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This article is part of a series in which leading commentators and policymakers give their views on alleviating the devastating global slowdown
The writer is chief economist at the OECD
Policymakers are braced for a stormy quarter as the Covid-19 pandemic intensifies. But what if the outbreak lasts more than just one quarter?
The economic reactions of individual countries have been strong, swift and targeted to buffer businesses and households affected by confinement measures. Countries are implementing — albeit with varying scope and speed — short-term working schemes for employees, extended to the self-employed, to preserve worker and household income. They are providing credit lines, tax relief and mortgage holidays to help businesses weather the storm, all the while directing huge resources to the health sector. Governments have poured very large amounts into these schemes. In some cases, they have not set limits. And rightly so.
Yet, financial markets have reacted tepidly, destabilised by the immense uncertainty regarding the evolution of the virus, the largely uncoordinated global health response and its economic and financial consequences. Because of this uncertainty, markets are unable to price risks or economic expectations. Some scientists suggest the outbreak may recur later in the year, either because of an uncoordinated response or if no vaccine or cure is available.
An outbreak lasting more than a few months raises questions about how short-term, targeted responses, designed for a temporary shock, must be amended or strengthened in the context of prolonged weak growth, depressed corporate valuations, low employment, high debt and low inflation.
On the health front, more financial, logistical and manufacturing resources would need to be allocated to materials production. If the virus continues to spread across borders, increased international co-ordination and information-sharing will be crucial. More resources for data collection and sharing, research, machinery and equipment, and support for emerging and low income countries, will be of the utmost importance. Creating and expanding dedicated health funds at the regional level are steps in the right direction. But pooling forces globally will also be essential. Serious money and human capital is needed. But first and foremost, advanced economies, starting with the EU, need to agree a common framework for quarantine, containment and testing policy — and then implement it together to avoid prolonging the crisis and returning waves of infections.
On the economic front, the issue is that a temporary loss of output may turn into a longer one. In financial terms, preventing the shock from shifting from a liquidity one to a solvency one, may require even more forceful policies. First, do no harm: governments should continue to support the private sector, including by taking equity stakes, and to bolster employment. This will require a large increase in public spending and investment at a time of falling revenues. Ultra-accommodative monetary policy will continue to help in addressing rising debt, while co-ordination between central banks can provide international liquidity. Government guarantees may, in turn, become government ownership of some sectors of the economy.
The hefty demands on government finance need not result in unsustainable issuance of debt that would spook markets: it requires new and creative thinking on macroeconomic policy issues.
Markets should be left with no doubt that all countries afflicted will have the necessary ammunitions. The European Central Bank’s €750bn corporate and sovereign bond buying is a good move. It will also be timely to remove the issuer and issue ceiling on ECB bond purchases and finally use jointly issued European bonds to raise funds. Multilateral institutions are likely to need additional funds to support emerging countries.
The next steps demand enhanced co-ordination of fiscal and monetary policy. Central banks directly crediting firms and household accounts may raise considerable challenges, including democratic ones, and be impractical.
Another option would be for fiscal support to be financed by a permanent increase in money supply, created by central banks, which could substitute for debt-financed programmes. This approach should not raise fears of inflation as long as growth remains below potential, and central bank independence is respected. And it would reassure markets about the capacity of governments to support the economy.
A number of steps in this direction have been taken in the past few weeks. As the virus spreads around the world, co-ordinated and synchronised monetary and fiscal action will become more and more important.