This latest article by Dr.Gerstenfeld was first published at the Begin-Sadat Center for Strategic Studies, (BESA), and republished here with the author’s consent.
PREPARING FOR ECONOMIC POLICIES AFTER THE CORONAVIRUS
By Manfred Gerstenfeld
The Coronavirus pandemic has led to huge societal problems in many countries. In such an unprecedented reality, it is important for governments to start early planning for actions to take after the virus-related major difficulties come to an end. If such an agenda is created up-front, albeit full of holes, new plans can be added as developments occur.
The following is only an initial indicative idea of how to begin setting an agenda for economic policies in a post-Corona world.
Among the multitude of societal issues, the economy will have to take priority. Lockdowns and other government decisions have already destroyed significant parts of the Gross Domestic Product of many countries for this year. Simultaneously, unemployment has greatly increased.
Huge financial state intervention will be necessary. In several countries the first steps have already been taken. How to best intervene is far from clear. Various governments will follow different policies. As extremely big amounts of money are at stake, simultaneously ongoing critical efficiency assessments have to be undertaken. Large wastage and abuse in such a fluid situation could add to the catastrophic situation.
Already from the beginning of these interventions there should be a concept of how one ultimately gets back to an, albeit different, normal economy. Democracies ruled by center or center-right governments want to return to a non-socialist type reality as soon as possible. This requires ongoing evaluations during the mass-injections of money into society. Countries that do not do this risk falling into the trap of becoming de facto socialist.
There is yet another risk. In view of the massive interventions and the need for results as soon as possible, there is the temptation toward more authoritarianism. This has two facets. One is that those in power will want to avoid costly civic opposition which delays what they have decided must be done. Governments may thus wish to use emergency measures. The other danger is a possible trend in society in which citizens consider the use of civil rights by others an attempt to stall economic advancement. That could lead them to vote for more populist and authoritarian parties.
This development may also be stimulated as expectations of parts of the population about the help they will receive from the Government are far greater than what can and will be delivered. New checks and balances will have important roles to play in government policies, not only as far as economics are concerned. It also remains to be seen how the interventionism will affect the earlier growing action against human-caused climate change.
There will be a temptation to nationalize essential industries and financial institutions in deep trouble. This only makes long term sense with respect to some unsuccessful privatizations of state-owned industries, where that would have been inevitable anyway. The failed British railway privatization and break-up come to mind.
For other corporations in such great need of state help that governments have to acquire their shares, nationalization should be temporary. Israelis may, for instance, remember that the government became the shareholder of the bigger institutions when the banking sector collapsed in 1983. When the banks became healthy again and the stock markets permitted it, their shares were sold off.
In the meantime, another issue is coming to the fore. How does one trade off the huge economic cost of the loss of GDP and greatly increased national unemployment against the need to take extreme measures to fight the health impact virus? That discussion will grow already much stronger in the coming weeks. There will be pressures to return to ‘normal,’ come what may.
The value and price of life is not a new subject in economics, even though it is often kept out of the public eye. There are many risk evaluations where a specific amount to save a human life is factored in. Health care funds, to give one example among many, have to determine the cost of expensive medication to be reimbursed against the number of lives saved by it, or better said, prolonged.
The greatly increased number of people who have become unemployed needs to be addressed by major governmental measures. Temptation is great to make state payouts to all citizens or to large groups of them. This can only be done on a large scale for a short time. The exceptions are countries with a small population and significant income from oil or other natural resources.
In this framework, a government service has to be set up which systematically investigates those who are falling outside the safety net and what can be done for them. For certain businesses, permanent closure or bankruptcy is unavoidable. Their employees will thus become jobless. Many self-employed will be unable to restart their activities. Thus, countries which were used to low percentages of unemployment will have to live with much higher figures of jobless.
This necessitates already today planning of extensive retraining programs. Governments should assess vacancies and assess which of those can be filled by newly unemployed. This is even more relevant in European countries where the birth rate is below, sometimes even much below, replacement level.
The debate on the need to reduce the impact of globalization has already started. Governments will have to rethink which products should be made in their own countries even if these can be imported at a lower cost from elsewhere. Some pharmaceuticals immediately come to mind. Shortages were reported in various countries. The regular suppliers from India could not provide the drugs because the raw materials did not arrive from locked-down China.
One specific major body on which the Coronavirus pandemic has had a huge impact is the European Union. (EU). The most important effects can all be brought under a single heading: How far does European solidarity go? National governments have made a number of decisions which went against European solidarity. Germany for instance has kept certain medical equipment for itself and not exported it to other European countries.1 Germany has also closed its borders to citizens from several neighboring EU countries.2
In the past, the 1985 Schengen agreement was a great step forward toward easing travel within large parts of the EU. One could move from one of the participating countries to another without passport control. Other border controls were also abolished. This created a sense of meaning of Europe. The recent closure of borders of some neighboring EU countries has to the contrary created a greater awareness of living in a specific country rather than within the Union.
All this pales against a huge financial problem. Initially, the attention focused on Italy. It is the hardest hit country in the European Union so far by the Corona pandemic. There may be an even greater impact of the crisis on its economy than on that of other EU members. In the years before the 1999 introduction of the Euro, one most helpful step would have been the devaluation of the Italian currency. This is no longer possible.
The Corona crisis shows again what a dramatic mistake the introduction of a joint currency was while individual member countries continued with diverging fiscal and economic policies. As an aside, Brexit looks far more promising nowadays. The British government can make plans for their country’s economic recovery without taking into account Brussels’ bureaucracy.
Ianis Varoufakis was Greek Finance Minister during part of the country’s economic crisis. He recently published an article in which he relates the economic dictate that was imposed on Greece by the EU. He explains that in practice the economic restrictions were dictated by Germany. Whatever proposals he made on behalf of his country were not even considered. Varoufakis warned that such a policy could not be repeated toward Italy, a far bigger and more powerful country.
As long as the focus for financial assistance measures was exclusively on Italy, the huge problems the E.U. is facing were seen in a more limited form than is the case today. For many European governments it would have been already extremely difficult to pass legislation through national parliaments for providing loans to Italy like those made in the past to Greece This is not only because of the much bigger amount of finance needed. Euroscepticism has greatly increased in recent years in several EU countries. So has the number of parliamentarians with these views. They would have strongly opposed such financial assistance.
At the time, which is only a few weeks ago, it was considered that even if funding for Italy was forthcoming, the harsh conditions demanded by the EU would probably have led to the collapse of the Italian government. A new government, headed by Matteo Salvini, leader of the Northern League would be its major component. Such a Eurosceptic government would possibly introduce an alternative currency, which could be used in Italy in addition to the Euro. This could be a way of gradually taking Italy out of the joint currency. Yet another problem for the EU is that Italy has been an important annual net contributor to the EU. That may now end.
In the meantime, however, the EU has been overtaken by a far bigger problem. Ten EU members, among which Italy, Spain, France and Belgium want the EU to issue Eurobonds amounting to hundreds of billions of Euro in Eurobonds to assist them with their financial problems. These bonds can only be sold if there are proportional national guarantees for them. Germany, the Netherlands, and Austria announced their total opposition to this. This may turn into the largest conflict about mutual solidarity the EU has ever faced. The tension on this issue is rapidly rising.
All of this only deals with part of the issues affecting the economic sector. Much economic research also will have to be done. All of the above is nothing more than the beginning of an agenda with many holes. Much more time will be required to gradually fill at least part of them.