The Corona-Economy is already the grand economic challenge of the year 2020, but also of the political establishment. The latest developments are very serious, quite worrying for many sectors, which demand a coordinated response in terms of economic policy. The Coronavirus is the “black swan” that sickened the economy, rapidly and at a nearly global scale, like a tsunami starting from China that is washing away over all continents now.
Medical experts seem surprised, as do economists. The public strategy solutions proposed for flattening the Coronavirus contamination curve are different or even divergent, as are the economic solutions. On the part of the economists, however, what comes as a bewilderment are the extreme interpretations which have been given to the impact of the virus on economic affairs.
On one hand, we have a minimalist approach, which discounted the economic implications of the pandemic. Despite its rapid propagation from China to Europe, with obvious implications for any economic context based on integration, the initial assessments invoked a minimal impact on our economy, in defiance of the essential logic of prudence and responsibility.
On the other hand, we have a maximalist approach, which places the Coronavirus crisis in a framework of statist intervention with adverse effects on individual freedom. These anti-interventionist interpretations argue that the application of crisis measures to… crises would lead to a curtailing of fundamental rights and freedoms of individuals. Of course, the future may witness these fears coming to fruition, but it is hard to fathom the present forgiving these mistakes.
It is by now obvious that the first half of 2020 must be spent under the sign of the Corona-Economy. However, economic crisis scenarios must be formulated responsibly, to understand and manage the immediate consequences on important economic activities and sectors: the distribution of goods and services, the transport of people, tourism, a crisis of trust in the financial system, and a general economic malaise brought on by a demand crunch.
As well, we must be ready for more profound consequences, as yet immaterial, but which will influence the speed with which we regain normality through the reestablishment of trust, an appetite for investment and a zest for life in society.
Independently of the force of economic instruments for intervention, it is important to understand that no country is fully prepared for burgeoning mistrust. This is why trust is the most important form of capital in crisis situation management, in ensuring the stability of the economic system and predictability in its recovery.
With regards to reestablishing trust, the first essentials are the capacity for imposing adequate rules during crises, both administratively, but also as regards the social order, which informally adapts to crisis situations.
In the current paradigm of technology and mobility, the modern economy has become a complex organism, more exposed than ever to contagion risks. This is why, before launching packages for “general immunizations” in the heat of the moment, the solutions must be geared towards the directly affected sectors, with clearly defined measures, which would limit the effect of contagion. Even if the economic body is already “sick”, its functioning must be ensured, major roadblocks must be avoided and the business environment must be sent clear signals of confidence.
Ultimately, the crisis of confidence is more dangerous than the economic crisis per se, given the collapse in investment appetite and the depressive mood of the global financial markets. If confidence collapses, then random financial injections, without any structural reasoning, are nothing but useless priming, which can throw markets off on inadequate trajectories. This is why public policy must cater, obsessively almost, towards rebuilding trust in a qualitative sense, not just quantitative.
Recently, within just a week’s time, the economic expectations went from the minimalist register to the level of recession. Uncertainties and contagion effects will impact the next two trimesters.
For instance, as regards the external flows, Italy is Romania’s second largest commercial partner, and our other important European partners, such as Germany and France, are also in the grip of Corona-Economy fever. In a first phase, the commercial flows freeze or succumb. Over time, as economic adjustments intensify, the effects of commercial contagion will appear in successive waves, even after the pandemic has come under control.
Economic prognoses are subject to severe volatility. It is hard to tell whether the economic recovery will be in V, U or L shape, the latter of which meaning that profound damage with structural effects will be experienced.
In essence, the Corona-economy crisis could reshape the industrial and commercial structure on a global scale, could restructure the price system, investment geography, human capital and, perhaps most importantly, the commercial and mobility system that currently defines the order of economic globalization.
We know that Corona-Economy will die down, sooner or later, as the actions of the authorities check the spread of the epidemic and confidence recovers.
What is to be done in the economy? This is the first time that public policy is facing a stop-and-go paradox. That is, we need to stop mobility and interaction in society and, at the same time, we need to (re)start the economy through various proactive measures and schemes to support employees and entrepreneurs.
In order to stop the spread of the pandemic, the authorities impose strong measures to isolate and reduce people mobility. In these conditions, the economic measures to stimulate demand and production, be they on monetary or fiscal channels, are somewhat in contrast to the “stay at home” objective of this emergency situation.
In the meantime, there was a strong emphasis on the need to prevent the fall of financial systems through liquidity injections. It is a prophylactic measure, to ensure financial stability, which will alleviate the feelings of anxiety in the population.
However, to hope that liquidity injections will be able to restart the economic system in the current pandemic situation, as in the case of a classic economic crisis, might prove unwarranted given the different contexts. The measures that worked 11-12 years ago will not produce the same results in the current context of the public health crisis. Currently, the real economy is frozen, decoupled from the financial sector.
This is why the efficiency of economic measures depends, primarily and mainly, on the success of medical measures and pandemic control. From this point of view, the “rash” economic decisions taken under the pressure of the moment will have to wait their turn with regard to expected effects, when the pandemic will be medically neutralized.
Medical solutions can preempt economic problems, while economic solutions cannot, by themselves, solve the medical problems posed by the Coronavirus pandemic. Gradually, however, through the application of both types of solutions, the economic organism will recover its vitality, probably with a boost to its immune system, as well, with less globalization, and with lessons learned in the area of responsibility in social action.
(The above text is the English version of the Romanian article by Cosmin Marinescu, University Professor Economics PhD., Presidential Advisor)
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