Overview publications

A survey of German, Spanish and Austrian firms in the industry, services, retail trade and construction sectors finds that the overwhelming majority expect a negative impact of the corona-crisis on annual turnover (to the tune of 20% in Germany and Austria and 25-44% in Spain). The sub-sectors hardest hit are manufacturing of consumer durables and investment goods, services in the field of tourism and gastronomy and retailers selling neither food nor beverages. If confinement measures aren't lifted or countered by appropriate policy support, say the survey's authors Raquel García (SIMPLE LÓGICA, Madrid), Christian Gayer (European Commission DG ECFIN), Werner Hölzl (WIFO - Austrian Institute of Economic Research, Vienna), Sergio Payo (Ministerio de Industria, Comercio y Turismo), Andreas Reuter (European Commission DG ECFIN) and Klaus Wohlrabe (EconPol Europe, ifo Institute, CESifo), the prevailing confinement measures will cause insolvencies or bankruptcies of 30-50% of all businesses by the end of July, rising to 50-80% by October.

The Covid-19 crisis is not a financial crisis but it can become a serious test for European banks’ strength and resilience: they are stronger today than they were on the eve of the 2007-2008 financial crisis, however the Covid-19 shock more closely resembles the Great Depression of the 1930s. This policy brief from Jézabel Couppey-Soubeyran (EconPol Europe, University Paris 1 Panthéon-Sorbonne, CEPII), Erica Perego (EconPol Europe, CEPII) and Fabien Tripier (EconPol Europe, Université Paris-Saclay (Univ. Evry), CEPII) presents the problems that the Covid-19 crisis poses to banks, the proposals currently under discussion and the decisions taken to date by the monetary and prudential authorities. It highlights the fragility of the current prudential framework and the inadequacy of the resolution mechanism, which will require additional resources if the banking crisis cannot be avoided.

The road to recovery is long and winding, says Stefano Schiavo (EconPol Europe, Università di Trento) but it's one we have to take: exceptional measures are needed to exit the economic crisis triggered by the coronavirus, which will see national governments at the forefront of business support and demand stimulation plans.This will lead to a sharp increase in public debt of dimensions never seen in the post-war period, but it's crucial to direct public spending towards initiatives that generate growth and contribute to solving future problems.

In the absence of a treatment or vaccine, there are two options available for managing Covid-19: long confinement of a large proportion of the population and the associated economic costs (Plan A), or to progressively build herd immunity by exposing the population to the virus (Plan B). But attaining herd immunity requires governments to expose a fraction of the population to the virus, and to recognize that some people in this targeted population will die. Christian Gollier (EconPol Europe, Toulouse School of Economics, University of Toulouse-Capitole) uses standardized guidelines to identify ‘optimal’ herd immunity policies but warns that the moral concerns related to such a policy would go against several decades of policy evaluation practice.

Periods of crisis increase xenophobic outbursts and anti-immigrant sentiments, which can lead policy makers to target migrant workers in the hope of quickly restoring labor demand for natives - particularly when health crises are the root cause. But curbing the rise of unemployment by restricting access to the labor market and encouraging the departure of foreign workers is ineffective. In times of crisis, macroeconomic policies to stabilize economic activity and stimulate recovery are crucial to stop the rise in unemployment.

The expenditure necessary to avoid the Covid-19 health crisis turning into a long-lasting deep recession is enormous and raises the issue of how it should be financed: through new debt, or monetization? Monetization - defined as the financing of public expenditure through money creation by the central bank without being reimbursed by the government - has long been rejected by mainstream macroeconomics. This policy brief analyzes in detail some recent theoretical arguments of mainstream macroeconomics to rehabilitate monetization. The authors suggest policy makers consider monetization to finance Covid-19 related spending in the current macroeconomics context, combining secular stagnation features and a very high stock of public debt. In the specific context of the Euro area, monetization raises important political issues.

Between 2013 and 2015, in the aftermath of the global financial crisis, the Portuguese government revoked four holidays for public and private employees - but the revocation seems to have served little economic purpose and been no more than a ceremonial gesture. In this paper, authors António Afonso (EconPol Europe, Universidade de Lisboa; REM/UECE), Maria João Guedes (Universidade de Lisboa; Advance/CSG), Pankaj C. Patel (Villanova University, Villanova School of Business) show that revocation of the holidays did not impact labor productivity for either central or local and regional government managed state owned enterprises.

This paper from Dorine Boumans, Sebastian Link and Stefan Sauer (EconPol Europe, ifo Institute) presents the results of a survey of 1000 economic experts in 110 countries on the economic effects of the COVID-19 pandemic and the effectiveness of different policy measures to combat the crisis for different countries. The results indicate that economies all around the globe are severely hit by the COVID-19 crisis. The experts perceive the reductions in investment to have the strongest impact on their domestic economies. In consequence, the experts expect a severe recession in almost all countries in 2020, followed by a long period of economic recovery. The experts rate emergency liquidity assistance to firms as well as temporary tax deferrals for businesses as the most effective policy measures, but do not regard other responses such as helicopter money or lenient bank supervision as being well suited to combat the crisis. 

The purported advantages of corona bonds over the ESM are meagre to non-existent, says Friedrich Heinemann (EconPol Europe, ZEW). The challenge we face is to contain the spread of COVID-19 while stabilising the economy and ensuring eurozone states have sufficient liquidity and the ESM is a suitable tool for pursuing these ends. However, we should wait until the acute phase of the crisis has passed before engaging in discussion of how to handle high debt levels and possible cases of insolvencies among eurozone nations, and the difficult question of who finally bears the burden of unsustainable debts.

Does the coronavirus crisis call for solidarity within the EU, or within the euro area? Daniel Gros (EconPol Europe, CEPS) argues that being hit by an unforeseen epidemic has nothing to do with euro area membership and the present situation is a case which requires solidarity at EU level. And, he says, there's a plausible and simple way to organise a real expression of EU solidarity without engaging in any large-scale financial transactions.

This article first appeared on VoxEU.org: https://voxeu.org/article/corona-transfers-instead-coronabonds