The global economic crisis caused by the Covid-19 pandemic is not simple to deal with, nor is it easy, because for the first time in peacetime both demand and supply are being affected at the same time in the affected economies». All economists worldwide are revising their estimates of the magnitude of the economic downturn over time, while the general view is that after the end of the pandemic crisis there will be a global “V” type economic growth.
by Thanos S. Chonthrogiannis
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In fact, the induced recession will be deep, sharp and we hope to remain temporary rather than a long-term horizon. Both the monetary and budgetary authorities of the countries responsible for the formulation of the respective economic policy are doing the most of the expected:
- Increasing quantitative easing (monetary policy)
- Reduction of taxation and deferral of the tax liabilities (fiscal policy)
- Increase government expenditure by providing liquidity to households and businesses (fiscal policy).
in order to be able to cope with the economic turbulence caused by the Covid-19 pandemic.
At the end of the crisis
At the end of the crisis and the return to normality for the affected economies, we will most likely see:
- An increase in salaries of a certain category of occupations (i.e. medical and nursing, farmers, etc.).
- An increase in unemployment benefits due to the rise in unemployment up to date during and after the crisis.
- An increase in the price of gold and other minerals belonging to the rare earths’ category, which gold will maintain its reputation as a safe investment haven.
The ‘proposed therapeutic recipe’ for economies to overcome the crisis
As we mentioned at the beginning of our analysis, the economic crisis caused by the Covid-19 pandemic does not require policies based on the logic of an economic cycle that include policies with expansive fiscal and monetary policy, which in turn are intended through their induced support for demand to increase production and supply in the economy.
At this stage of lockdown and quarantine, the affected economies need a strong bridge-financing policy:
- To not collapse healthcare systems.
- To compensate employees who are either made redundant or enter in a forced leave status.
- To maintain their drastically reduced functionality and capacity.
- To maintain operational readiness in the economy.
If properly implemented and at the appropriate timing these bridge-financing policies, then will be achieved:
- To not shut down a large proportion of enterprises in the affected economies.
- To limit as much as possible the scale of the recession in the affected economies.
- To be able the economy to restart quickly at a rapid pace after the end of the health crisis.
- To achieve a quick return to normality.
Since the amounts required for bridge-financing policies and the risk involved are very high because they concern all businesses and employees in an economy, this financial bridge to the economy cannot by definition be taken over by the banks of the affected country as a whole.
This finding is since commercial banks in the affected economy should be virtually untouched and have open credit lines for businesses to seamlessly finance the growth rates of after the end of the crisis.
For these reasons it is the state of the affected economy which must spend huge sums of funds and take entirely substantial share of the risks that arise to both employees and businesses.
All these proposed policies should be done by temporary (one-offs) and not permanent measures, so that in budgetarily measured terms they measure, as much as possible only the budget deficit of the 2020 state budget and not in the annual state budgets of later years.
When the world’s largest and most powerful economy (US), the Federal Government votes to provide a fiscal support package of about $2trillion equivalent to about 20% of the country’s GDP, in order to support businesses and employees in its economy, it must be understood that the budgetary amounts that will be required to be used for bridge-financing policies in each of these affected countries and economies respectively will be able to reach a double-digit percentage of their GDP.
The problems created by giant borrowing in affected economies
- The increase in public debt due to a decrease in GDP in the ratio (P.D./GDP) for 2020.
At the same time, the levels of public debt are being increased in order to finance the above public expenditure.
In these cases, the real goal is to service these public expenditures smoothly and not so much how high will be the amount of public debt. This service is currently possible because of the negative interest rates that characterise the economies of developed markets.
- The second problem that arises is finding the unfettered liquidity to finance public expenditure of this magnitude.
For the USA
There’s no such problem.
For the Eurozone
A low-interest open credit line should be created with the Guarantee of the European Stability Mechanism (ESM) which could be used by the Eurozone member countries affected by the Covid -19 pandemic, but on the other hand the governments of these member countries will must implement equivalent fiscal value measures in their economies in order to limit the size of the fiscal deficit on their annual state budget for the year 2020, which in this case this fiscal deficit is expected to be huge.
Equivalent fiscal value measures mean dismissals of civil servants for further reduction of public expenditure while reducing public sector payroll costs as annual government revenues from corporate taxation would have been drastically reduced due to the suspension and/or partial suspension of the operation of undertakings.
In conjunction with the parallel implementation of the ECB’s Pandemic Emergency Purchase Program (PEPP) totaling €750bn and the simultaneous abolition by the ECB of the ECB’s ceilings in its initial quantitative easing program (33% per member-country and per bond) is a sufficient liquidity cushion to deal with the economic consequences of the Covid-19 Pandemic in the Eurozone.
Why the issue of a «European Covid-19 Investment Recovery Bond (ECIRB)» is wrong?
It is a major strategic mistake for the Eurozone to issue common Euro-bonds after the Covid-19 pandemic crisis and the ECB’s new PEPP quantitative easing program is completed.
EU leaders should turn their attention to the period of recovery and Europe’s long-term priorities. In order to achieve this in a successful way, the European Council must first ensure the full implementation of a common fiscal, tax and economic policy throughout the euro area.
However, achieving this means that the annual state budgets of the euro area member countries should be the same in terms of the maximum percentage of public expenditure in their annual state budgets.
A commonly accepted cap level in public expenditure, e.g. 15% of annual GDP, in the annual state budgets of all euro area member countries would enable the implementation of a homogeneous fiscal policy throughout the euro area and a joint commitment of all public debts of all euro area member countries under the one and only Federal Eurozone Government based in Brussels.
More details on the implementation of this plan please read the analyses entitled «The Proper Way to Achieve the Single Operating Federal Type Budget of the Eurozone- Part I» and «The Proper Way to Achieve the Single Operating Federal Type Budget of the Eurozone- Part IΙ».
Only in this case could the Federal Eurozone Government issue common European bonds of different durations for the euro’s total yield curve (Bonds with duration lasting from 1 year to 30-50 years), issued by the Eurozone Federal Government.
In this case, however, it is a precondition that the governments of the euro area member countries must give a large part of their executive powers to Brussels first and foremost. The future will show whether the leaders of the member countries will have matured enough to take this great step that will successfully end European integration.
Without this step, any European Type Bond issue «European Covid-19 Investment Recovery Bond (ECIRB)» with issuer a European institution (i. e. ESM, EIB etc.) and with the funds guaranteed by this institution, it will be a dismal failure and rightly established euro area member countries such as Germany and the Netherlands, etc. refuse to consent to the issue of such a bond for Covid-19 pandemic.
