On April 21 and 22, we hosted our sixth – and first virtual – New Paradigm Workshop, together with the recently launched project “Transformative Reponses to the Crisis”. What was originally planned as a workshop on potential future financial, political or climate crises and how to prepare for the next crisis, was rearranged to focus on the current Corona crisis and its consequences. Altogether 35 experts discussed on 9 different panels the economic impact of the crisis on Germany and beyond, what governments and central banks can do to combat it and what a prolonged downturn will mean for the eurozone. They also debated the implications for the future of globalization and whether this crisis could act as a catalyst for a paradigm shift in economic thinking.
Session on the Corona pandemic – When and how to exit the lockdown
Germany is – for reasons that are not entirely clear – not suffering a health crisis of the magnitude of the other big four western European countries. But the economic hit to Germany is not going to be very different from those to other countries, if we look at for instance forecasts from the IMF. Uncertainty about when the economic lockdown will be lifted is doing a lot of economic and social damage in Germany, which is why we discussed proposals on how Germany should execute exit strategies.
At the time of this workshop, the pandemic had started to ease in most countries. At least, the growth of the number of deaths per million inhabitants had significantly slowed. In this context, there was an intense discussion on whether the current lockdown of activity should be eased in order to reduce its economic impact.
Veronika Grimm, newly appointed member of the German Council of Economic Experts, presented a proposal that she made as part of a multi-disciplinary group on April 3.
“There are many challenges that will keep us busy for months, and maybe more than a year or two.”
“The opening up must be gradual and, where objectively justified, differentiated according to regions, groups of people and areas of social and economic life, for instance due to different dynamics of the pandemic.”
“We need task forces at federal and state level that combine all perspectives of different disciplines that are important to judge whether an opening is possible or not, and that make decisions fast enough to react to reoccurring infection dynamics on the way.”
Sebastian Dullien, Director of the Macroeconomic Policy Institute IMK, commentedthat the recommendations of the IMK Policy Brief on an exit does not differ much from Veronika Grimm’s proposal and highlighted:
“The last step of the contact restriction in Germany didn’t add too much to our zero reproduction rate. So, if we open carefully and keep the distance in retail and caution the people not to have too many contacts, that there is a chance to keep the reproduction rate below or close to one.”
“According to our estimates, only around 1/3 of the expected drop in economic activity in 2020 in Germany will be caused by contact restrictions. So, the direct economic cost of the lock-down is not the immediate concern. The larger part comes from a drop in global demand and interruptions to supply chains. Thus, keeping the stores closed for another week is not as bad as having a relapse which then again leads to problems in global supply chains.”
Session on the Real Economy Crisis – Towards the Great Corona depression? How deep and long will the recession be?
Truth be told, there is really no comparable event and so it is extremely difficult to assess the longevity of the crisis. Will there be a second or third wave of the virus like some Asian countries are experiencing already? To illustrate the severity of the crisis, Sebastian Dullien pointed out:
“In Germany, Kurzarbeit might reach more than four million people, compared to 1.5 million in the 2009 crisis.”
The recession demands a European solidary answer which for labour market purposes got acknowledged by the SURE program. European countries are economically intertwined like no others. Silvia Merler (Algebris) pointed out that
“about 50 percent of the value added in the Italian manufacturing sector is actually driven by consumption abroad.”
While being in a severe lockdown, these Italian companies cannot fulfill the orders of other international companies which then might switch suppliers and will not return – effectively putting Italy in an even deeper recession. Achim Truger from the German council of Economic Experts highlighted a similar pattern when detailing the links of Italian and German value chains.
This exemplifies, that while, as Nicola Brandt (OECD) pointed out, the share of GDP of directly affected business sectors may not be substantially huge, the disruptions of international value chains are the real trigger of a deep recession. This indicates all the more, that a quick recovery of all European countries, is in the best interest of every single member state.
Session: Corona Financial Crisis – Crash and debt: Towards another meltdown?
On the financial crisis panel, Joscha Wullweber, Rainer Voss and Gerard Schick from “Finance Watch Germany”presented a new study on the impact of the corona crisis on the financial market. The study focusses on the fragility of the shadow banking system and how it is prone to struggle during crisis moments. Taking account of Hyman Minsky, Joscha Wullweber acknowledges that crises are inherent of the current system making necessary central bank crisis measures a question of when and not if, with a new crisis cycle starting after each new bailout measure. Referring to the Fed, Wullweber concludes, that an unstable system leads to declines in employment and economic activity during crisis times like we are witnessing right now, while a stable financial system would even then continue to meet the demands of the economy.
“When financial markets still aren’t more resilient to shocks, despite all the central bank interventions, this might be due to the still important role of shadow banking where central banks cannot act as lenders of last resort”
Martin Hellwig, Director (em.) of the Max Planck Institute for Research on Collective Goods and one of Germany’s most renown economists, stressed that the real economy can affect the financial sector and vice versa:
“There is a risk that the real economy crisis will provoke chain reactions and spillovers to the banking sector that may exacerbate the debt overhang.“
Holger Schmieding, Chief Economist at Berenberg Bank, defended markets and returned on a more positive note:
“Relative to the size of an output drop of 30 to 40 percent since January the financial system is probably working better than one would have expected, which is also due to help of governments and central banks“
Holger still urged Germany to react in a more convincing way to the crisis in Europe:
„A perceived lack of solidarity could jeopardise the long-term cohesion of the EU and the Eurozone.”
Dorothea Schäfer from DIW Berlin warned:
“In Germany, there is no awareness of a banking crisis ahead”
Session: Central banks to the rescue? Is this the time for helicopter money?
Central banks are and will be crucial to the resilience of the current system. But they can only function properly with a parallel response of fiscal authorities.
The huge need to finance this crisis and help the economy recover has led some to propose that central banks should start to directly finance public spending. During this session, there has been a lively debate around this idea of “helicopter money”. Forum economist Marc Adam first presented his paper explaining the fundamental history and idea of the concept (here).
In order to support fiscal action across the EU, Eric Lonergan (M&G Investments) proposed a different mandate for the ECB:
“Maybe the ECB should simply target yields and say that the difference between the highest and the lowest interest rate by country should not be more than, let’s say, 0,5 percentage points. The mandate of central banks is not to stabilize asset markets, but to stabilize demand.“
Peter Bofinger (University of Würzburg), however, refrained from the idea of using the ECB as the actor to stabilize demand since
“only fiscal policy can be targeted enough to handle the specific problems of the corona crisis.“
He argued, that the public sector should take over the debt caused by the crisis, which is an idea based on the Modern Monetary Theory (MMT). Without defending MMT, Martin Hellwig said that inflation as the usual concern with public debt will not be an issue at all during the crisis.
Regarding Europe, the diverging paths of Northern/Central and Southern countries were identified as the major problem. Daniela Gabor (University of Bristol) emphasized that
“there is an exorbitant privilege for Germany in the euro-zone due to its status as a save haven.”
With the possibility of lending money relatively cheap, Germany is in that sense obliged to help its struggling European allies. This should be in the national German interest as Nicola Brandt and Achim Truger pointed out earlier in the workshop when detailing that the main cause of a recession in Germany is the crippling foreign consumption.
Session on fiscal policy: Will the trillions be enough? A long-term recovery plan – for what and for whom?
The discussion brought about a consensus on the need for further stimulus and recovery programs beyond the short-term help to firms and employees during the pandemic.
Robin Brooks from the Washington based Institute for International Finance argued that there is still a huge need for US fiscal policy to compensate for the losses induced by the Corona shock to the US economy:
„In the US the corona crisis will cause a loss of 4 trillion US dollar this year, which is around 5,5 percent of annual GDP. The help decided up to now is about 2,5 trillion US dollar. There is thus another 1,5 trillion to be covered with additional programs.“
Unlike European countries, the US had the benefit of currency sovereignty and the Fed seemed to be willing to do whatever it takes, Robin noted. However, recent numbers show, that unemployment numbers keep rising fast and could be including 30 million Americans. While the US suffered severely from the financial crisis, the recovery path was more promising than the one of the EU. On the other hand, a bad health care system and insufficient unemployment schemes indicate the lacking resilience of the US economy.
Antonella Stirati from Roma Tre University argued that the current crisis itself will have a big effect on public finance in Italy:
“Even without further spending, the Italian public debt will rise to 150 percent of GDP, simply due to the collapse in economic activity”
The euro crisis, she said, is still omnipresent in the discussion of EU aid in Italy making help conditioned through the ESM – implying renewed austerity – almost impossible:
“Italiens won’t accept another round of austerity”
Antonella described the fundamental argument behind euro bonds as an alternative:
“Austerity has persistent negative impacts on output, as recessions have. This has perverse effects on debt ratios and leads to vicious cycles. For Italy the only way out is to ensure low interest rates and allow for a fiscal stimulus.”
Clear enough, Corona bonds would allow for low interest rates and a commonly financed fiscal stimulus.
French economist Shahin Vallée, currently fellow at the DGAP in Berlin, also put an emphasis on the narrow window for a common response of collective fiscal action across the EU. He stressed, that the EU should act fast because similarities of the financial crisis are already arising and could only get more apparent with time passing:
“current policies in Europe will turn a symmetrical shock into an asymmetrical shock deepening economic divergences inside the Euro Area. I worry that we are repeating the mistakes of the last crisis. We are basically in the same position.”
In fact, countries most hit by the crisis are those that have much less financial capacities to act against the economic shock. This risks to aggravate the split.
Session on the Eurozone – Time for euro bonds?
The asymmetry of possible fiscal stimuli by different Euro countries was also the dominant topic of the Eurozone panel. The question remains even after the European Council meeting that still left a lot of questions open.
For a summary by Simon Tilford of the panel that included Silvia Merler (Algebris), Moritz Schularick (University of Bonn), Christian Kastrop (Bertelsmann Foundation), Jakob von Weizsäcker (German Finance Ministry) and Christian Odendahl (Centre for European Reform) please go here.
Session on crisis moments and paradigm shifts – How to make us more resilient
In this session our panelists discussed whether the current global crisis could lead to a paradigm shift in economic thinking and policy.
Patrick Love from OECD’s New Approaches to Economic Challenges unit (NAEC) stressed that only well-rounded systems will be able to cope with future crises as these will potentially be of a different nature than the onee of the past:
“2008 was probably the last crisis of the old-fashioned crises, a crisis with an identity. [..] The new crisis we are seeing today and the crises we will be seing in the future will start as one type of crisis and very quickly evolve into other types of crises. So, a health crisis quickly becomes an economic crisis, a social crisis, a trade crisis, a political crisis, and so on.“
Patrick also shared his insights from consultations with engineers and physicists:
„Resilience and efficiency often involve a trade-off. When you try to optimize one part of a complex system, generally, you destabilize the system as a whole. So, you have to think holistically.“
But in his opinion „there are signs in the OECD and in the governments we are talking to, that people are beginning to think like this. They are questioning the paradigm.”
Laurie Laybourn-Langton from the Economic Change Unit in London presented first results from a study commissioned by Forum New Economy on the history of crisis moments and paradigm shifts:
“it has been extraordinary to watch in the UK and other countries around the world the sacred cows of the existing paradigm be so readily slaughtered by those that are in government. But the general strategy of change through crisis is, I would contend, becoming increasingly imprudent because of the nature of the crises that are coming.”
Katharina Pistor, Professor of Comparative Law at Columbia Law School echoed this caution mentioning a convincing historic example and stressed the uncertain outcome of crises.
“We should not build on crises to hope for change, because crises are by definition unpredictable how they end up. And when colleagues here in the US say we should just have a major crisis and then things will change […], I always remind them that in the 1930s the US got the New Deal and Germany got fascism. And which one will be the likely outcome is always difficult to predict.”
„Paradigm shifts that we might or may not see depend very much on the political economy of different systems. And even within those systems we might see some change and not other. So, you could imagine that the US takes an even more authoritarian turn and yet in terms of the structure of the economy, of the financial system not much will change. So, we can have rather differential effects.”
Maja Göpel, Secretary General of the German Advisory Council on Global Change thinks that in the process of the Corona pandemic , “we have been experiencing a wake-up call to what really matters, and I think that should inform the priorities.”
“For social resilience, which is at the essence of running economies under high uncertainties, there is a lot of focus on actors and power relations and the possibility of actors to bring forward alternatives and to avoid vulnerabilities. So, of adaptation capacity and the emphasis on transformation if necessary; being prepared to do things differently, and having the courage, the knowledge and the ideas to do so.
Session on crisis moments and paradigm shifts – Will this pandemic derail globalization?
We discussed the impact of the current pandemic on globalization with a distinguished panel of experts: Pascal Lamy, former Director-General of the WTO and President emeritus of the Jacques Delors Institute, Ian Goldin, founding Director of the Oxford Martin School and author of the book, “The butterfly Defect: How globalization creates systemic risks, and what to do about it”, Laurence Tubiana, CEO of the European Climate Foundation and key architect of the Paris Agreement, and Harold James, renown economic historian and specialist on German economic history and on globalization.
Pascal Lamy started the discussion by arguing that:
“The Covid crisis is not a failure of globalism but a failure of localism. What happened was that sovereign states did not properly prepare. And if you look at Korea, Taiwan or Hong Kong; they did better than others while being much more globalized than average.”
Ian Goldin also questioned whether globalization is the original sin that produced the virus and suggests that the argument on globalization and health needs to be much more nuanced than we are hearing from some:
“Without globalization one wouldn’t have the huge advances in health around the world which we have seen over the last 35 years on average life expectancy improving by 20 years. And that is no doubt due to vaccines as well as ideas and other technologies that are spread.
For Harold James, the fact that there were more and more people and governments pushing for a reversal of globalization seemed a paradox, given that
“this is a global challenge; it is impossible to really work against it effectively in a national setting”. He added, ”I don’t think is a coincidence: it really does appear as if those governments who are most dedicated to the push-back on globalization have been doing the least well on the competence test in terms of responding to this international crisis.”
All experts agreed on the fact that globalization had already been slowing down due to other reasons:
“[t]he biggest question in my mind is how one manages the butterfly defect of globalization and that of course could get worse if countries turn their back. What the US is doing is going to make the butterfly flap its wings even more aggressively; it’s going to lead to the next pandemic being more likely and more vicious. So, the biggest question in my mind is how we build resilience while we have fragmentation in governance.”
“Will we get deglobalization? I would argue that supply chains had a peak last year and will likely decline anyway, also due to automation, 3D print, robotics. Combined with customization, just-in-time delivery and nationalism and protectionism they were all together bringing production home near markets.”
“What’s good about the current crisis is that all orthodoxy has been thrown out the window. Things that seemed impossible six weeks ago, like basic income, like bailing out large parts of our economy, like having massive deficits across our economies all are mainstream economics now.”
“An impact of the crisis on globalization will be a rebalancing of the equation between efficiency and resilience which will lead to some reconfiguration of the productive systems – not a big wave of reshoring but some diversification. [..] There will not be deglobalization but a different kind of globalization. A bit what would happen if relative prices change. Because what changes with Covid 19, economically speaking, is a repricing of risk which will make global capitalism less efficient and hopefully more resilient.”
“Since 2014 or so global trade has been growing less than industrial production, the story of the shortening of the global value chains is something that has taken place for a number of years now. Already before the Corona crisis, we were going into a phase which many people call“slowbalization” – globalization slowing down – and what it looks as if theCorona crisis has done is to radicalize that and push us into “nobalization”where we are just cutting off any kind of linkage.”
“What kinds of activities are going to be deglobalized and what are going to be newly globalized? I think for instance that we have two areas which in all countries of the world have been involving major increases in costs, medical provision and education, which are actually capable of being globalized by electronic communication. The crisis is pushing telemedicine to a much greater extent […] I think it is also a chance of globalizing education.”
“The Covid 19 pandemic is a test for globalization and multilateralism.”
She is concerned that climate efforts are now pushed back and therefore argues that “[w]e have to pivot from a discussion on climate pushing coop26 goal towards having to embed climate now in the recovery more as a feature of what the transformation should be. That’s why I think the Green Deal is really the window of opportunity we have in Europe. And we will not have a second one.”
“In January 2020, we were in a growing momentum for climate action for many reasons. And now, Covid 19 is a major challenge to that. […] The challenge the climate action is facing is that everything is legitimately focused on the economic supply side crisis and the embedded social crisis. […] I think there is a rush to quick support and to try to go back to normal that is in a way in contradiction or in tension with a more transformative agenda.”
By Anne Zweynert de Cadena, Thore Beckmann and Thomas Fricke