Governments have announced ambitious programs of economic relief. Regrettably, they remain trapped in the conventional modes of fighting recession, without acknowledging that this time it must be done differently.
Now that the waters of the devastating Covid-19 tsunami have started to recede, it is time to take inventory of the damage caused and ask if we are doing the right things to tackle it. The damage has been immense, on a scale not seen in the last 150 years. To give just two examples, one on each continent, we already know that more than 30 million American workers have enrolled for unemployment benefits in just the six weeks since the social isolation measures in mid-March. In Spain, almost five million workers, including employees and self-employed, are under Temporary Regulation (suspension) of employment and 900,000 have stopped contributing to Social Security. Most of them are sure candidates for unemployment, which the IMF expects to reach 21% by the end of 2020. The drop in consumption is estimated at between 30 and 40 percent. And all this disaster despite an enormous effort of fiscal spending, which will bring the deficit to about 12 percent of GDP.
The response of most developed countries to face the crisis has also been bold, as shown in the table of Covid-19 Support Programs. Programs usually have three components:
• Immediate fiscal impulse: expenses in the health system, subsidies for suspension of employment, forgiveness of contributions, etc.
• Deferrals of taxes, social security contributions, utilities, etc.
• Liquidity and guarantees: lines of credit, liquidity assistance, export guarantees.
The first component reflects the immediate fiscal effort, while the second is just a temporary deferral of contributions to public agencies. The third is just a promise that could eventually materialize in the future.
The first thing that draws attention is the disparity in the power of fire of each country. Germany can afford to commit resources (immediate or potential) of up to 52% of GDP. France, the United Kingdom and the United States range between 15 and 25% of GDP, while Spain reaches 11% and Greece 4%. The case of Italy is atypical – when not? -, because its immediate fiscal aid barely reaches 1%, while deferrals and future promises of liquidity and guarantees reach 43% of GDP.
What mainly counts in dealing with the initial disaster is immediate fiscal impulse. It is important, therefore, to pay attention to the figure of immediate fiscal support. Only Germany, the United States, the United Kingdom and, to a lesser extent, France have the muscle to mobilize sufficient immediate fiscal resources to face the damage of the pandemic. Italy, Spain and Greece, on the other hand, will not be able to directly spend more than 1 percent of GDP, a figure that seems totally insufficient, even for this first wave of infections. Not to mention the fiscal power of most developing countries, including all of Latin America, where the fiscal bazooka looks more like a water pistol aimed at the Covid-19 flare.
We do not have yet figures on how many of the companies “temporarily” closed will be able to reopen. Reopening is not as easy as turning a key, least of all when demand has plummeted as well. In many cases, the temporary suspension will likely become a permanent closure, implying a permanent loss of productive capacity. Every country will emerge poorer from the crisis.
Unfortunately, the governments of the developed world have not heeded what experts were recommending at the beginning of the crisis, which was to keep companies alive no matter what and no questions asked until the acute phases of Covid-19 passed. Initially, the figures that governments announced for the first round of support seemed reasonable, but they have failed to think “outside the box” on how to execute them. They want to apply credit-based schemes while knowing that virtually no one is going to be able to pay these monies back. They also intend to channel credit through the same structures that traditionally administer loans and public guarantees, which are not known for their agility. A month after the rescue program started, the Spanish ICO had set in motion barely 5% of the guarantees approved for companies. Time is really of the essence here, because once closed, companies are not likely to reopen.
Economic activity has been put into “induced coma” by generalized quarantines. What was needed was to preserve the companies’ vital signs by covering their operational costs and holding on to their employees. Too much time and attention has been wasted on discussions about how emergency programs should be financed or what the impact on the fiscal deficit will be. In the end, if the financial markets become reluctant to buy bonds issued by the states, there is always the recourse to monetary financing by the central banks, what has recently been called “helicopter money”. Many well-respected economists have justified and supported this “unorthodox” way of financing the Covid emergency.
Once again, as in the 2008-2009 Global Financial Crisis, everything points out to the United States emerging better and faster from the crisis than the rest of the Western world. The Federal Reserve is doing and will do whatever it takes to resurrect the economy. As ruthless and inequitable as the North American economic model might be, the truth is that its deregulated labour market allows companies to close and open quickly and inexpensively. Besides, the US government enjoys the “exorbitant privilege”, as French President Giscard d´Estaing once described it, granted by its status as issuer of the world’s hegemonic currency, the dollar. It allows it to issue unlimited amounts of debt, which then ends up “paying” back with the money that the Federal Reserve itself creates. Nice work if you can get it.
Monetary financing of Covid-19 relief programs is not that easy in Europe, particularly in the eurozone, whose central bank is owned by 19 countries and has an explicit prohibition on financing governments, directly or indirectly. Some creativity in circumventing the statutes of the ECB was shown by the ECB president at the time, Mario Draghi, when the euro was floundering in 2011-2012. Such agreement, however, looks today hard to reach due to the ideological gap that divides Northern and Southern Europe. The North is not willing to relax its principles of austerity, control of the fiscal deficit and limits on public debt. Nor is it willing to abandon the principle of individual responsibility (Haftungsprinzip) of each country. The South, including France, considers that the extreme severity of the coronavirus crisis justifies and demands that there be solidarity between European countries and that the costs of those most affected – those of the South – be shared by all. The mechanisms proposed by the South are various (issuance of common bonds, financing from the ECB, a community reconstruction budget), all of them with a strong component of solidarity.
The relief programs envisioned so far, such as the almost €500 million support package approved by the Eurogroup, are not sufficient to face the magnitude of the problem. Nor is the burden-sharing component sufficiently present to prevent recipient countries from being thrown by the financial markets into an inferno where over-indebted and fiscally unviable countries go up in flames, as happened in the eurocrisis. This time around, Germany has made a great effort to bridge the gap between North and South, as it does not want to repeat the mistakes of a decade ago. Its internal political reality, however, together with the ordoliberal creed that permeates the German marrow, makes it exceedingly difficult to accept a “mutualization” of the costs of the crisis. Nor does Germany’s success in handling the pandemic help matters: as in the euro crisis, it is too much to ask Germans to understand that they have to pay the bill for breakages caused by others who didn’t do things correctly.
An even more serious problem are confronting the developing countries. The lack of virus testing and/or poor official records makes it difficult to gauge the real magnitude of the pandemic and the phase which each country is in, but there is no reason to suppose that its severity will not be as bad or worse than that experienced by the European countries. Virtually no developing country today has the fiscal leeway to build support programs that are in line with the magnitude of the recession ahead. Capital has long sought safer havens, while governments are heavily in debt. If they could issue debt in their own currencies and have their central banks buy it up, much of the problem would be solved. Nothing is easier than to create money by financing the government. Unfortunately, in the current circumstances of little slack, the ghosts of inflation and devaluation will soon set limits to helicopter money policies in the developing world (except in dictatorships that do not care about hyperinflation).
This desperate situation has led many economists and politicians to speak out and call on the developed world to declare a debt moratorium in the developing countries or, ideally, to forgive debts in the most serious cases. The G7 ministers expressed at their meeting on April 14 a willingness to temporarily suspend the service of bilateral and private debt (about 32,000 million dollars) of 76 poor countries, especially African ones. But the multilateral entities (IMF, World Bank and regional development banks) are the ones with the key to solving the financing problem of these countries. These multilaterals will also have to grant moratoria on existing debt service, but this will not suffice on its own. The granting of new money will also be necessary, but it cannot have the traditional form of new debt, subject to conditions. For starters, there is no way that poor countries will ever pay off that debt. Adding it to the existing debt burden would amount to perpetuating the delusion that those countries may one day be able to repay what they owe.
It is up to the IMF to take the lead on this crusade. This institution is the only “lender of last resort” available to poor countries. The IMF can create its own international money by issuing Special Drawing Rights. Without going into the technical complexities of this instrument, what is important to highlight is that it is in the hands of the major shareholders of the Fund to allow that money to be created and handed over to countries in need, without it becoming a new layer on the heavy slab of debt. Hopefully, rich countries have already learned why this action is absolutely convenient for them too: the brutal spread of the pandemic has made it clear that there is nowhere to hide in this global village.
Miguel I. Purroy 