Economic policy in the Corona crisis: Making the most of a crisis?

Covid-19 has paralyzed the global economy. What does this mean for Germany’s unprecedentedly internalized industrial sector? Here we give an overview of the economic policy implications:

Credit: Martin Lopez
 

Italy has already imposed unprecedented controls on people’s freedom of movement in an attempt to arrest the spread of the virus. Germany is gradually increasing the number of restrictions. Most major events and conferences have been cancelled. Tourism has been hit especially hard, putting small and medium-sized businesses under unprecedented pressure. Businesses dependent on consumption spending face a fight for survival.

So what needs to be done the support the German and wider European economy? Many economists are calling for co-ordinated action by governments and central banks.

Christian Odendahl & John Springford: Bold policies needed to fight the coronavirus recession

Christian Odendahl (CER) and John Springford (CER) make a series of policy recommendations to combat a recession brought on by the coronavirus. Pointing out the parallels to the 2008 financial crisis, they argue, “Financial crises are, in essence, collapses in trust in the financial system. Creditors fear that they are exposed to losses and seek safer assets, which in turn leads to shortages of liquidity. Riskier businesses have difficulty borrowing, rendering some insolvent. Tighter financial conditions also lead households and firms to cut spending.” The economic fallout can be contained, but only if policy-makers in Europe provide aggressive stimulus. Both firms and workers need help to manage crisis. Banks, public investment banks, the ECB and finance ministries need to work together to provide a comprehensive package.

IMK, IW, IfW et. al.: Wirtschaftliche Implikationen der Corona-Krise und Wirtschaftspolitische Maßnahmen 

A group of leading German economists from various institutions present a paper on the economic consequences of the Corona crisis at a federal press conference on March 19th, in Berlin.

The economists, who work for institutions with often conflicting ideological positions, agreed that the German government was right facilitate reduced working hours and to relieve companies of having to make social security contributions for workers on reduced hours. Bankruptcies and layoff needed to be prevented in order to limit the long-term economic damage from the crisis. The authors recommend the partial abolition of the country’s Solidarity Tax together with a deferral of income and business tax payments. They stressed that the country’s so-called budgetary ‘black zero’ should be set aside, as it permitted by EU rules and Germany’s own ‘debt brake’. In addition, it was imperative to provide liquidity to the financial markets and even for the government to take equity stakes in otherwise healthy companies. International solidarity, especially towards Italy, was needed to prevent a financial crisis there engulfing the eurozone as a whole.

Germany is highly dependent on two of the economies most affected by the Coronavirus: China and Italy. At the press conference, Sebastian Dullien (IMK) noted that the quarantine measures in place in Northern Italy could be particularly damaging for the German economy as they threat “just in time” production, whereas the impaired links with China posed less of a challenge.

Barry Eichengreen: Coronanomics 101

Writing for Project Syndicate, Barry Eichengreen (University of California, Berkeley), focused primarily on the need for policy action to support healthcare systems. This was partly about additional fiscal funds, but also effective communication between the responsible institutions and the public. The popular trust needed to maintain confidence in the economy required open and honest communication; healthcare experts needed to be free to speak their minds and their advice had to be acted upon.

Lucrezia Reichlin: COVID-19 is an opportunity for Europe

Lucrezia Reichlin (London Business School) argued that the coronavirus is an opportunity for the EU, which tended to make progress in the face of a crisis. She called for a coordinated EU-level fiscal response. After being unable to do this following the last crisis, the eurozone now needed to use the current one to develop common crisis management tools as well as pool fiscal resources and develop a common budgetary strategy. In order to prevent a liquidity crisis SMEs should temporarily be given guaranteed access to credit. Governments’ handling of the coronavirus would reveal how vulnerable the global economy is to unexpected shocks affecting numerous economies simultaneously. The EU needed to show it could cope with this crisis but also other ones coming down the line.

By Thore Beckmann

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