The war against the coronavirus has been ongoing for several months and, steadily, we are learning more details about this mysterious enemy.
We have discovered that there are notable differences between this coronavirus and SARS that make it much more difficult to control. For example, that a large part of those infected are asymptomatic, and therefore don’t know that they are contagious. Or that the average length of stay of affected patients in ICUs is not a few days, but a couple of weeks, which has contributed to the saturation of hospitals. Faced with such surprises, governments around the world have been forced to take drastic measures of social distancing and restriction of mobility. For the sake of all of us.
These measures are paying off: contagion and mortality curves are flattening, and the pressure on hospital capacity is alleviating. Uncertainty remains high about the contagion rate, and therefore about the mortality rate, and this uncertainty will only be reduced with the results of the large-scale testing projects that are being deployed in various countries, including Spain.
Now we must ensure that, after winning the war, we do not lose the peace. Wars leave profound consequences, and this virus has attacked a eurozone that still had raw wounds from the previous crisis, highlighting the flaws in its economic structure. The eurozone faces the stark reality that it does not have the instruments to design its fiscal policy. With interest rates at zero probably for many years, fiscal policy will be the only instrument available to manage the level of activity, reduce unemployment, and stabilize inflation. And the eurozone is not ready.
Now we must ensure that, after winning the war, we do not lose the peace
The health crisis could become a major economic crisis if the response, beyond the measures adopted to mitigate the effects of the lockdowns, is not commensurate to the needs, and the economic reconstruction plan that must be adopted as soon as possible responds to this urgent existential need. Taboos are being broken in all countries: the Fed is buying debt from states and municipalities; the Bank of England is financing the government directly; the European Central Bank has suspended the 33% limit for purchases.
However, the recent Eurogroup agreements, with the new European Stability Mechanism (ESM) credit line, the European Investment Bank guarantees, and the unemployment support program, are only minor and marginal improvements. In order to recover from the greatest crisis of the last 50 years, it is necessary to go much further, both in quality and quantity.
The economic reconstruction plan must be based on three principles: ensuring that pre-existing economic disparities in the eurozone do not increase; helping increase potential growth and advancing the eurozone’s strategic objectives; and being of sufficient magnitude and persistence in time to generate the necessary fiscal impulse to close the output gap (which the International Monetary Fund’s World Economic Outlook projections suggest could be very large), eliminate cyclical unemployment, and raise inflation to the 2% target as soon as possible.
The economic reconstruction plan, and its financing, are the opportunity for the eurozone to show its values
This multi-year plan can be designed around three pillars. Firstly, helping the elderly, ensuring that a new pandemic (or the long duration and possible re-emergence of this one) does not cause such a catastrophe again, with an investment plan in healthcare and technology that provides each country with the necessary resources to successfully manage it. Secondly, helping younger generations, deploying an investment plan and regulatory measures that reduce the risk associated with global warming and the economic cost of the ecological transition. Thirdly, helping those in need, attacking the technological inequality of the eurozone – individual, between countries, and with respect to the rest of the world – with an investment plan in the digital economy that puts the eurozone at the frontier of individual access and innovation. Each country must design its contribution to this plan, which would be approved by the leaders of the eurozone and ratified each year in the annual budget round.
Once the plan has been agreed, its financing must be designed, under the fundamental principle that the cost should be the same for all eurozone countries, as befits a plan that responds to a shock that is common and exogenous, will generate positive externalities for all its members, and will increase the stability of the euro. For example, the ESM, an entity whose mission is to ensure the stability of the eurozone, could issue bonds guaranteed with a transfer of tax revenues or an equivalent capital increase. The proceeds from these bonds would be transferred to each member country to finance the items in the reconstruction plan. The term and repayment structure could be designed with the objective of reducing the near-term debt service burden, creating fiscal space for the national fiscal policies needed to mitigate the immediate economic impact of the mobility restrictions.
There is a saying in politics: “Don’t tell me what your values are, show me your budget and I will tell you what your values are.” The economic reconstruction plan, and its financing, are the opportunity for the eurozone to show its values.