Policy Brief Europe's Pandemic Politics - Economic Developments around the World Fiscal and Monetary Consequences of Covid-19 Risk, Insurance and ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
2020
July
Policy Brief
Europe’s Pandemic Politics
Economic Developments around the World
Fiscal and Monetary Consequences of Covid-19
Risk, Insurance and Solidarity
Markets, Policies and Structural Change
European Economic
Advisory Group
@The European Economic Advisory Group (EEAG) analyzes key economic policy
issues of common European concern. It aims to offer the public and policymakers
research-based insights. Taking into account the variety of perspectives within
Europe, the group fosters bridge-building between research and policy as well as
across European countries.
THE MEMBERS OF THE EUROPEAN ECONOMIC ADVISORY GROUP
Torben M. Andersen
Aarhus University
EEAG Vice-Chairman
Professor of Economics at the Department of Economics and Business Economics, Aarhus University.
Former chairman of the Danish Economic Council
Giuseppe Bertola
University of Turin
Professor of Political Economy
Clemens Fuest
ifo Institute and LMU Munich
Professor of Economics and Public Finance at LMU Munich, President of the ifo Institute, Director of the
Center for Economic Studies, Executive Director of CESifo GmbH and Speaker of EconPol Europe – the
European network for economic and fiscal policy research
Cecilia García-Peñalosa
Centre National de la Recherche Scientifique and Aix-Marseille School of Economics
Professor of Economics at the Aix-Marseille School of Economics, Research Director at the Centre
National de la Recherche Scientifique (CNRS) and a member of the Ecole des Hautes Etudes en Sciences
Sociales (EHESS)
Harold James
Princeton University
EEAG Chairman
Professor of History and International Affairs, Claude and Lore Kelly Professor of European Studies,
and Director of the Program in Contemporary European Studies at Princeton University
Jan-Egbert Sturm
KOF, ETH Zurich
Professor of Applied Macroeconomics and Director of the KOF Swiss Economic Institute, ETH Zurich.
President of the Centre for International Research on Economic Tendency Surveys (CIRET) and Editor
of the European Journal of Political Economy
Branko Urošević
University of Belgrade
Professor of Finance and Operations Research and Director of the International Masters in Quantitative
Finance (IMQF) programme at University of Belgrade
EEAG Policy Brief
Publisher and distributor: CESifo GmbH, Poschingerstr. 5, 81679 Munich, Germany
Telephone +49 89 9224-0, Telefax +49 89 9224-1409, Email ifo@ifo.de
Reproduction permitted only if source is stated and copy is sent to the publisher.
Suggested citation: EEAG Policy Brief (2020), EEAG Report on the European Economy, CESifo, Munich
www.cesifo.orgECONOMIC DEVELOPMENTS
1. Economic Developments around the
World: Corona Crisis Leads to Worst
Recession in 90 Years
The Covid-19 pandemic and the measures taken to is that the pandemic seems to be abating, although
contain it led to massive disruption of social and eco- discussions and fears of a second wave have arisen.
nomic life. What at the beginning of the year looked In other countries, such as the United States, Brazil
like a local outbreak in Hubei Province, China, with or Peru, the pandemic is still very present. Broadly
little impact on the rest of the world, quickly turned speaking, the pandemic started in Asia, moved to Eu-
into a global pandemic that has so far caused more rope and subsequently to North America and finally
than 600,000 confirmed deaths and resulted in un- South America and Africa.
precedented protective measures. There are signifi- Curfews, travel restrictions and border closures
cant differences among countries, both in terms of the were imposed worldwide, non-essential businesses
pandemic course and the political and fiscal measures were closed, and social distancing policies were in-
that have been implemented. The number of new in- troduced. There have also been, and still are, major
fections per million inhabitants shows that the pan- differences in these protective measures: Italy and
demic appears to have been successfully contained France, for example, have introduced much stricter
in many Asian countries and in e.g., New Zealand (see lockdowns than Germany. The United Kingdom only
Figure 1.1). There are still differences in relative new introduced relatively mild containment measures af-
infections between countries such as Portugal or the ter a delay, when the first restrictions were already
United Kingdom on the one hand and Germany or Aus- relaxed in China and although Sweden did step up its
tria on the other. But what many European countries measures, they remain low by international compari-
– with the exception of Sweden – have in common son (see Figure 1.2).
Figure 1.1
Covid-19 Pandemic in Selected Countries: New Cases per Week per Million Inhabitants
Mildly Impacted and Well Mastered Clearly Impacted and Largely Mastered
Hungary China Japan Germany France
New cases New cases Italy Austria Switzerland
South Korea New Zealand
100 900
90 800
80 700
70 600
60
500
50
400
40
30 300
20 200
10 100
0 0
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Clearly Impacted and Stabilizing Still in the Middle
Portugal United Kingdom Sweden United States Brazil
New cases New cases
Iran Belarus Russia Chile Peru Saudi Arabia
800 4.000 South Africa
700 3.500
600 3.000
500 2.500
400 2.000
300 1.500
200 1.000
100 500
0 0
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Source: WHO (2020). © CESifo
EEAG Corona Policy Brief 2020 July 3ECONOMIC DEVELOPMENTS
Figure 1.2 In view of the effective lower bound, extensions
Containment Measures in Selected Countries and new versions of asset purchasing programs have
Oxford Covid-19 Stringency Index
been put in place to provide additional liquidity to
China Germany Spain financial markets (see Figure 1.4). Of the four major
France United Kingdom Italy
Japan Sweden United States central banks in the western world, the two most ac-
100 tive ones in this respect are the Federal Reserve and
90
80 the Bank of England. This new wave of liquidity is a
70 reason why financial markets quickly recovered from
60
50
the initial shock and appear to have decoupled from
40 the real economy.
30 Although the containment measures were only
20
10 adopted in March in most European countries, to-
0 gether with changes in social behavior, such as so-
January February March April May June
2020
cial distancing, they immediately led to significant
Source: Oxford Policy Tracker (2020). © CESifo declines in value added. Despite signs of recovery
in the months of January and February, after weak
Figure 1.3 economic developments in 2019, the effects of social
Central Bank Interest Rates distancing and the containment measures were so
Deposit rate (ECB, euro area) Bank rate (BoE, United Kingdom) severe that macroeconomic data reflecting the full
% Target policy rate (BoJ, Japan) Federal target rate (Fed, United States) first quarter, i.e., including March, turned dark red.
3.0
Final domestic demand, and private consumption in
2.5
particular, collapsed (Figure 1.5). These few weeks
2.0
were able to generate European growth rates for the
1.5
full quarter that were more negative than those of
1.0
the worst quarter during the Great Financial Crisis.
0.5 GDP in the Euro area fell markedly by 3.6 percent
0.0 that quarter. The greatest negative contribution came
– 0.5 from private consumption. Households reduced their
– 1.0 activities in response to the rising number of Covid-19
2014 2015 2016 2017 2018 2019 2020
Source: European Central Bank; Federal Reserve Bank of St. Louis; Bank of England; Bank of Japan; last accessed on
infections and on instruction or advice from the gov-
11 July 2020. © CESifo ernment to stay at home and respect the social-dis-
tancing rules.
Figure 1.4 Also, numerous shops were closed, and many ser-
Balance Sheet Sizes of Major Central Banks vices were not available. Further, firms hold back their
Federal Reserve Bank of Japan investments due to liquidity issues and uncertainty
Index (2007 = 100)
1 400 ECB Bank of England about future developments. In addition, external de-
1 300
1 200 mand was weak and caused exports to plunge. Italy,
1 100 France and Spain were hit hardest by the Covid-19
1 000
900 pandemic and introduced strong lockdown meas-
800
700
ures. As a consequence, economic activity dropped
600 by 5.3 percent (Italy), 5.3 percent (France) and 5.2 per-
500
400 cent (Spain). Germany was affected less severely with
300 GDP contracting by 2.2 percent.
200
100 National accounts data were also negative for the
0 first quarter of 2020 in the United States. The slight
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Federal Reserve; Bank of Japan; European Central Bank; Bank of England; last accessed on 11 July 2020;
delay with which the United States was hit by the pan-
EEAG calculations. © CESifo demic meant that the percentage decline in GDP did
not quite reach the level reached at the height of the
Great Financial Crisis.
In a reaction to the crisis, central banks around Also, because Asia and in particular China was
the world increased the degree of expansion of mon- hit early in this crisis, global GDP fell strongly in the
etary policy by lowering interest rates wherever pos- first quarter of 2020 (see Figure 1.6). Although China
sible (Figure 1.3). The steady rate hikes implemented was already putting a strain on the aggregate fig-
by the Federal Reserve since late 2015 were quickly ures, the early March release of the Global Barome-
reversed. The limited room for maneuver that the ters still indicated a recovering world economy. This
Bank of England had in this respect was also quickly radically changed in the subsequent two months in
used. For the ECB and the Bank of Japan, the ef- which both the coincident and leading versions of this
fective lower bound had already been reached – no composite indicator based upon economic tendency
further interest rate cuts appeared feasible. surveys from all over the world dropped massively
4 EEAG Corona Policy Brief 2020 JulyECONOMIC DEVELOPMENTS
and reached levels lower than those seen in the Great Figure 1.5
Financial Crisis. Contributions to GDP Growthᵃ in the United States
Seasonally adjusted data
Recent international trade and industrial pro-
Change in inventories Foreign balance
duction data confirm the extraordinary extent of the
Final domestic demand (excl. inventories) Real GDP growth
crisis. According to these, from the end of last year %
8
until April this year, world trade and industrial pro-
4
duction plummeted by almost 8 percent and more
0
than 6.5 percent, respectively (Figure 1.7). Although
during the first months of the year this decline was –4
largely attributable to the emerging markets, the ad- –8
vanced economies have been hit particularly hard, es-
– 12
pecially in April. For the advanced economies, the de-
clines over the four-month period amounted to close – 16
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
to 10 percent and around 8.5 percent, respectively, ᵃ Annualized quarterly growth.
and in April alone the annualized month-over-month Source: US Bureau of Economic Analysis; last accessed on 13 June 2020; EEAG calculations. © CESifo
growth rate was almost 60 percent for both industrial
Contributions to GDP Growth in the Euro Area
production and trade.
In constant prices, seasonally adjusted and work-day adjusted
Not only in Europe, but in many parts of the
Change in inventories Foreign balance
world, the majority of the measures took effect mainly Final domestic demand (excl. inventories) Real GDP growth
%
from mid-March to mid-May this year. The early July 8
values of the Global Barometers, reflecting surveys 4
carried out in June, showed clear signs of recovery as
large parts of the world started to leave the lockdown 0
mode. Despite the easing of measures, the situation –4
at the end of the second quarter was still far from
–8
what it was before the outbreak of the pandemic at
the beginning of the year. With the exception of China, – 12
a massive global economic slump is expected for the – 16
second quarter. 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Eurostat; last accessed on 13 June 2020; EEAG calculations. © CESifo
Until May, unemployment or the number of peo-
ple in employment who are dependent on support
measures rose significantly. In the United States, the sectors are also extensive. In previous recessions,
unemployment rate peaked at 14.7 percent in April often only specific parts of the economy, such as
and stood at 11.1 percent in June, compared with construction or industry, were directly and severely
3.6 percent in January. In Germany and France, the affected, with subsequent, albeit mitigated, conse-
rates in May are significantly lower at 3.9 percent quences for other parts of the economy. In the cur-
and 8.1 percent respectively, but a large number of rent crisis, protection measures affected almost all
employees are currently on short-time work. The sectors directly and simultaneously. Whereas the ser-
Ifo Institute estimates that around 7.3 million em- vice sector often played a stabilizing role in previous
ployees in Germany were on short-time working in downturns, this time has been different. In particular,
May. This corresponds to 16 percent of all employees. hotels and restaurants, passenger transport, the en-
In France, a projected 10 million employees were tertainment industry and retail trade, where human
on short-time working schemes (35 percent of all interaction is unavoidable, were hard hit as early as
employees).
Often the change in the unemployment rate does Figure 1.6
not fully reflect what is happening to the number of World Economic Growth and the Global Economic Barometers
persons employed. In some countries, many have Coincident Global Barometer Leading Global Barometer Growth %
left the labor market or are in the process of doing 150 15
so, leaving not only employment but also the labor 125 10
force and therefore are not counted as being unem-
ployed. In Italy and Portugal, this effect is so strong 100 5
that the unemployment rate has actually fallen in 75 0
recent months (Figure 1.8). In the United States, the
50 –5
number of people employed fell by about 13 percent
between January and May of this year. The rise in 25 – 10
unemployment took up about two thirds of this – the
0 – 15
remaining third reflects a reduction in the labor force. 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Not only are countries affected differently and
not necessarily simultaneously, differences across Source: EEAG calculations (2020). © CESifo
EEAG Corona Policy Brief 2020 July 5ECONOMIC DEVELOPMENTS
Figure 1.7 lative retail sales in Germany fell by “a mere” 9.1 per-
Regional Contributions to Industrial Production and World Trade cent, while in France they have fallen by 32.6 percent
since February. Overall, the Euro area is likely to see a
Emerging and developing countries
Advanced economies
sharp recession in the first half of 2020. GDP already
World industrial production
contracted by an annualized 13.6 percent in the first
Index (2014 = 100) Annualized monthly growth in % quarter. During the second quarter, the decline of
116 10
GDP is forecast to be historic (– 40 percent).
114 5
Although the construction sector experienced a
112 0
110 –5
significant decline in value added in the first quarter,
108 – 10
it was previously booming in most European coun-
106 – 15 tries. Despite the sharp decline in the confidence in-
104 – 20 dicator for the construction sector in the Euro area
102 – 25 as published by the European Commission, it is in a
100 – 30 more or less normal situation from a historical per-
2015 2016 2017 2018 2019 2020 spective. The situation is quite different for compa-
nies in the services sector. Here the confidence in-
Emerging and developing countries
dicator is about four standard deviations below the
World trade Advanced economies
normal value and has never experienced such a sharp
Index (2014 = 100) Annualized monthly growth in %
116 30 decline over the course of one month (Figure 1.10).
114 20 What confidence indicators for the different sectors
112 10 have in common is that they all plunged in April and
110 0 recovered somewhat in May and/or June as lockdown
108 – 10 measures were partly eased. The overall European
106 – 20 Commission’s economic sentiment indicator fell from
104 – 30 94 points in March further to 65 points in April, re-
102 – 40
bounded somewhat in May and increased strongly in
100 – 50
June up to almost 76 points.
2015 2016 2017 2018 2019 2020
In addition to the containment measures and in
Source: CPB Netherlands Bureau for Economic Policy Analysis; last accessed on 2 July 2020;
EEAG calculations. © CESifo
order to preserve economic structures during this
period, many governments adopted support meas-
ures for workers and rescue packages and credit
the first quarter of the year (Figure 1.9). Retail sales in guarantees for affected companies. Moving out of the
the Euro area have fallen by a cumulative 20 percent lockdown, they have been discussing and implement-
since February. The losses are particularly large for ing stimulus packages to support the recovery. Over-
non-food items such as clothing and furniture. The all, the impression is that the “new normal” is going
exceptions are mail order and food retailing, which to be a world in which clear structural changes are
were able to increase sales during the crisis. The ef- needed with associated economic and social prob-
fects also vary from one country to another, depend- lems. All of this will lead to a substantial increase
ing on the type of containment and support meas- in government deficits and therefore debt-to-GDP
ures taken. The recession in Germany will probably ratios. The global easing of containment measures
be less severe than in France, which had decided on since mid-May and the support programs that have
much stricter measures and provided less financial been agreed are already leading to a strong catch-up
support. This is also reflected in retail sales. Cumu- process. Assuming that the remaining containment
measures are effective and that a second wave of
Figure 1.8 infection can be prevented by implementing appro-
Decomposing the Decline in Employment between January and May 2020 priate “track-and-trace” procedures, the global re-
Unemployed Labor force Employed covery is likely to continue, albeit at a steadily slower
pace in the coming quarters (Figure 1.11). Even when
United States
taking structural shifts out of the picture, economic
Canada
Portugal activity is unlikely to return to pre-crisis levels in
Austria most sectors. Hygiene measures and protective
Finland concepts are likely to remain part of the new real-
Netherlands ity until a vaccine and/or an appropriate medicine
Germany
is developed. This means that in particular compa-
Italy
nies in the hospitality, transport and leisure indus-
Japan
Luxembourg tries will have limited capacity to operate. Factories
and offices, however, will also have to make adjust-
– 30.0 – 25.0 – 20.0 – 15.0 – 10.0 – 5.0 0.0 5.0
%-change ments that will lead to lower capacity utilization and
Source: EEAG calculations. © CESifo productivity. We expect world GDP to reach only
6 EEAG Corona Policy Brief 2020 JulyECONOMIC DEVELOPMENTS
96 percent of its pre-crisis level by the end of this Figure 1.9
year. Reductions in Sector-Specific Value Added in the Euro Area
Q1 2020
Also, for the Euro area, the GDP level at the end %
of last year will be well out of reach by the end of 0
this year. On the demand-side, private consump- –1
tion is expected to fall further in the second quar-
–2
ter and to rebound in the second half of the year.
After plunging, gross fixed capital formation is fore- –3
cast to recover somewhat during the second half –4
of the year, but weak foreign demand, uncertainty –5
about future prospects and the fragile financial
–6
situation of the firms will dampen the rebound in
–7
investment. Industry Trade, transport
Construction Private services Public sector
There is likely to be an increase in insolven- (incl.agr.) and hospitality
Source: Eurostat. © CESifo
cies over the course of the year, and unemployment
should also settle at a higher level. Here, too, there
will be marked differences between countries. China Figure 1.10
and Japan were affected by the crisis much earlier Confidence Indicatorsª for Different Sectors in the Euro Area
and less severely than Europe or the American con- Construction Consumers Industry Retail trade Services
Standardized balance
tinent. These two countries are therefore more likely 2
to return to pre-crisis levels than Italy and the United 1
States, for example. Added to this are the differences 0
in fiscal support. Whereas the direct fiscal stimulus –1
in Germany is estimated by the think tank Bruegel –2
to amount to more than 15 percent of GDP, it is only
–3
3.6 percent and 0.9 percent in France and Italy, which
–4
have much less fiscal leeway. Here the reconstruc-
–5
tion program proposed by the European Commission 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
with a volume of EUR 750 billion will provide some ᵃ Selected (seasonally adjusted) balances on business and consumer tendency survey questions.
Balances are the differences between the percentages of positive and negative replies. These are subsequently
compensation. Although the United States has im- normalized to have an average of 0 and variance of 1 for the period from 1985 onward.
plemented extensive fiscal measures, it is questiona- Source: European Commission; last accessed on 13 June 2020; EEAG calculations. © CESifo
ble to what extent the labor market can be stabilized
and the loss of household income compensated. The to a gradual repatriation of certain industries and
high debt levels of private and public households are a diversification of value chains. On the one hand,
likely to make a rapid return to normalcy even more this development implies lower global trade, which
difficult. is particularly painful for open economies in Europe
The global economy will only return to its pre-cri- or Japan, and on the other hand it results in higher
sis level by the end of next year. The collapse in cor- costs for consumers. All in all, these factors lead to
porate profits in the wake of the lockdown and lower a world with lower growth.
demand expectations should noticeably dampen in- Because of the current capacity underutilization,
vestment momentum. In addition, insolvencies and core inflation is expected to fall as well. Although
restructuring will initially have a slowing effect. In- the oil price has recovered slightly from its very low
creased loan defaults and debt service arrears are levels at the end of April, it is still much below the
also likely to weigh on bank balance sheets, thus
restricting the scope for lending in some countries. Figure 1.11
In addition, private households will lose purchasing Comparing World GDP Developments
From year of crisis (t = 0) to 8 years after the crisis
power as a result of the pandemic-related rise in
unemployment and the slowdown in employment Great financial crisis Corona
growth in many countries, which in turn will have 102
100
a negative impact on consumption. Even in coun-
98
tries in which the loss of purchasing power has been 96
contained by rapid economic policy interventions 94
(short-time work, economic stimulus programs), the 92
more fragile economic environment compared with 90
the time before corona is likely to strengthen cau- 88
86
tionary savings motives and thus dampen consump-
84
tion dynamics. The new awareness of the fragility 82
of global value chains and the dependence on few 0 2 4 6 8
production sites also plays a role. This should lead Source: IMF and KOF (2020). © CESifo
EEAG Corona Policy Brief 2020 July 7ECONOMIC DEVELOPMENTS
price of one year ago. Therefore, the energy price ture waves as multiple measures have been or are
component is currently also pulling headline infla- currently being introduced to decrease vulnerabil-
tion down. Although there might be price increases ity, such as availability of health protection equip-
for some goods and services due to supply issues ment, testing capacities and measures to increase
related to the containment measures, these are likely hygiene. It is also conceivable that the development
to have comparatively small effects on headline in- of a vaccine could be delayed, which would mean
flation. Whereas inflation is likely to remain slightly that capacities in the affected sectors would remain
positive during the first half of the year, in the sec- limited for longer through “social distancing.” In ad-
ond half it will decelerate further and turn negative. dition, the liquidity situation of many companies is
The forecast assumes a stable oil price and USD/EUR deteriorating rapidly. An unexpectedly high number
exchange rate. of insolvencies might disturb the economic recov-
ery and cause greater problems than expected for
1.1. MAJOR DOWNSIDE RISKS the banking sector. Currently, in many countries new
regulations for postponing insolvencies were intro-
Any forecast statements are nowadays subject to duced, which means that these will become evident
even larger risks than usual. In the above it is as- later than usual, probably not before autumn. Also,
sumed that there will be no substantial rebound in numerous private households might run into solvency
the number of infections around the world. How- issues due to lower income and a worsening labor
ever, we are still learning about consumer reactions market. Such a sharp increase in insolvencies and
to containment measures and it is still unclear how non-performing loans could raise doubts about the
quickly consumption behavior will normalize. Fur- solvency of individual banks. As in the past, this in
thermore, the severity and length of the pandemic turn could lead to skepticism about the solvency of
are unknown. A second wave of infection with par- individual states with already high debt burdens in
tial, renewed lockdowns is conceivable, which would the Euro area. Various emerging markets are also
lead to a further economic slump. On the positive affected by this risk. The imminent development of
side, many countries will be better prepared for fu- a vaccine represents an upside risk.
8 EEAG Corona Policy Brief 2020 JulyFISCAL AND MONETARY CONSEQUENCES
2. Fiscal and Monetary Consequences
of Covid-19
The consequence of Covid-19 has been a simultane- of as the “fog of war.” In particular, this observation
ous shock to demand and output, as governments is relevant for the oft-repeated call for a clear “exit
imposed lockdowns in order to contain the spread of strategy.” Of course that would be highly desirable,
the pandemic and avoid the possibility of hospitals but it is sometimes hard to tell when a war has been
and medical facilities becoming overburdened. Gov- won or lost (the fiscal and economic costs remain);
ernments responded to the shocks with a broad range and obviously even harder to say when a war will be
of stimulus measures, as well as targeted spending won or lost. In this case, it is even unclear what end-
on health equipment and research, at a time when ing the war means. Macron rightly told the Financial
the reduction in economic activity drastically cut tax Times, “I don’t know if we are at the beginning or the
revenue. At the same time, monetary authorities all middle of this crisis – no one knows.”
over the world, including the European Central Bank
(ECB), responded with a wide range of extraordinary 2.1. FISCAL CONSEQUENCES
accommodative measures. A European peculiarity has
been the extent of the support given through loans In the large Eurozone countries, Germany initially
and guarantees to businesses hit by the lockdowns. voted a supplementary budget of EUR 156 billion
In both fiscal and monetary action, the old rule books (4.5 percent of 2019 GDP); in June, an additional
were thrown out. There has been an intellectual shift, package of EUR 130 billion (or 3.8 percent of 2019
and (fiscal) austerity is now a dirty word. There is little GDP) followed. In the first package, through the eco-
dispute that the overall policy response was neces- nomic stabilization fund (WSF) and the public de-
sary in order to prevent much wider collateral damage velopment bank “Kreditanstalt für Wiederaufbau”
from the virus and the epidemiologically necessary (KfW), the government is expanding the volume and
shut-down operations. access to public guarantees for firms of different sizes
The result of the policy response has been the and credit insurers, some eligible for up to 100 per-
sharpest ever increase in fiscal deficits outside war- cent guarantees, increasing the total volume by at
time, and, in fact, many key policy makers made ex- least EUR 757 billion (23 percent of GDP). In Italy,
plicit comparisons to wartime decisions. Xi Jinping, the fiscal package began with the “Cura Italia” pro-
on February 6, 2020 talked of a “people’s war;” Boris gram of March 17, a EUR 25 billion (1.4 percent of
Johnson, on March 17, 2019 stated, “We must act like GDP) emergency package. On May 15, the govern-
any wartime government and do whatever it takes ment agreed on a further EUR 55 billion (3.2 percent
to support our economy;” and Donald Trump, on of GDP) “Relaunch” package of fiscal measures. On
March 19, 2020 stated that in “… our big war, …we April 6, the Liquidity Decree allowed for additional
continue our relentless effort to defeat the Chinese state guarantees of up to EUR 400 billion (25 percent
virus.” European Union policy makers were only a of GDP). In France, the government announced an
little more restrained in making the wartime anal- increase in the fiscal envelope devoted to EUR 110
ogy: Emmanuel Macron, speaking outside a military billion (nearly 5 percent of GDP), including liquidity
hospital explained that, “When we engage in a war, measures. In addition, there is a package of bank loan
we engage completely, we mobilize united. I see in guarantees and credit reinsurance schemes of EUR
our country factors of division, doubt, all those who 315 billion (close to 14 percent of GDP). The United
want to fracture the country when we must have only Kingdom has adopted a similar path of large-scale
one obsession: to be united to fight the virus. I am guarantees, and public sector borrowing in April 2020
calling for this unity and commitment.” When Emma- alone was equivalent to that of the whole previous
nuel Macron declared “war” on the virus, he spoke year. State guarantees for loans to firms and other
with a framed Anglo-French war bond from the First liquidity support are currently estimated to amount
World War behind him. Angela Merkel was charac- to almost 24 percent of GDP. Guarantees are an es-
teristically more sober. In a rare television address, pecially large part of the fiscal response in Germany
she said: “The situation is serious. Take it seriously. (27 percent of GDP), and Italy (32 percent). The con-
Since German unification, no, since the Second World trast to the United States (less than 3 percent) is es-
War, there has been no challenge to our nation that pecially striking (Bruegel 2020).
has demanded such a degree of common and united The plans for a European-level response, includ-
action.” Wars are inherently uncertain in their out- ing the EUR 500 billion Franco-German proposal for a
come, and the economic consequences are all at the European Recovery Fund borrowing for the European
moment seen only through what Clausewitz thought Union for measures in support of the worst affected
EEAG Corona Policy Brief 2020 July 9FISCAL AND MONETARY CONSEQUENCES
Figure 2.1 ment in accompanying services: cleaning, hospitality
Fiscal Response to the Pandemic in European Countries (cafés, bars, restaurants), other personal services.
Immediate fiscal impulse Deferral Other liquidity/guarantee
Medical services (apart from those related directly to
the pandemic) also saw a collapse in demand, and a
Italy
Germany shift to new models (telemedicine). In general, ser-
Belgium vices were (unusually) more severely affected by the
France
downturn than manufacturing. The movie industry is
UK
Portugal also likely to be reshaped with movie theaters losing
Denmark ground and viewing relegated, mostly, to a few on-
Netherlands
line platforms. While many of these processes were
United States
Spain already underway pre-covid, the pandemic has sped
Hungary them up. Not only cruise ships, tourism, restaurants
Greece
and hospitality, fashion and clothing, trade fair and
0 10 20 30 40 50 60
% of national GDP (2019)
conference business, but also commercial real estate,
Source: Bruegel (2020), last accessed on 14 July 2020. © CESifo universities, even clothing and textiles are all likely
to take a longer-term hit. The shifts will be funda-
areas to be taken up to 2027, and the EUR 750 bil- mental − but we cannot be sure how precisely each
lion European Commission scheme (EUR 500 billion sector will respond.
in grants, the rest as loans) are treated in Chapter 3 All in all, it is quite possible that longer-term
of this report. The Commission proposal is that ad- alterations in the global and European economies
ditional own resources from four suggested sources may materialize. What are the immediate fiscal con-
would be used to repay the borrowing after 2027 and sequences? A large proportion of the loans given to
by 2058 at the latest: an emissions trading scheme, a businesses subject to structural or long-term decline
carbon-border-adjustment mechanism, a corporation will likely never be repaid, leaving a substantial fiscal
tax applied to companies that draw benefits from the burden. High levels of unemployment are also likely
EU single market, and a digital tax on companies with to remain in sectors where the drop in demand is a
a global annual turnover of above EUR 750 million consequence of structural shifts. In those cases, there
(European Commission 2020a). will be pressure for more permanent support mech-
There are some major uncertainties going for- anisms once the very widespread (and successful)
ward. The first one concerns the timing and speed of short-term support (Kurzarbeit) expires. Kurzarbeit
recovery as well as what the post-recovery world will was brilliantly successful in the Global Financial Cri-
look like. Even if a successful and affordable combi- sis, especially in German export-oriented factories
nation of vaccination and antiviral treatment is dis- which quickly benefited from the large infrastruc-
covered relatively soon, once new habits are formed ture investments of emerging markets, and during
it may be difficult, undesirable, or even impossible to the corona crisis it has been widely applied across
return to the old ways. Social-distancing measures Europe, with 45 million workers covered in France,
have become a powerful catalyst for speedy digitali- Germany, Italy, Spain, and the United Kingdom. Of
zation and automation of the economy. Supermarket that total, 9 million workers are in jobs that are
checkout clerks and other exposed workers might thought to be vulnerable in the longer run. So, what
simply be replaced by technology. Digitalization helps happens when there is no quick economic revival?
increase productivity while simultaneously reducing In that case, the Kurzarbeit or subsidized furlough-
both health risks and many types of costs. It opens ing program becomes a bridge to nowhere, with no
new business opportunities but also causes restruc- substantial long-term benefits but rather costs that
turing across many sectors of the economy. Impor- add to the fiscal burden.
tantly, in such an IT-innovation driven economy a few It is worth pointing out the political or political
winners typically take all, leaving other players losing economy dimensions of this problem: if the money is
ground or disappearing altogether from the market perceived to have been spent effectively, as with the
(see EEAG 2020, Chapter 2). Kurzarbeit schemes after 2008, there are substantial
Some of the crisis-era shifts are likely to become benefits in terms of voter support and political le-
permanent: For instance, there will be a substantial gitimacy, and the model would become more widely
shift to remote-office working and internet confer- imitated. But if the money is thought to have been
encing. Many sectors and occupations will be made wasted on white elephant or vanity projects, the con-
obsolete. The commercial real estate sector may be sequence is political opprobrium and delegitimization.
seriously impacted as a result of the collapse in de- War spending may sometimes look good in retrospect,
mand for offices, with little new construction. That but even in the case of victory it may look like an
development will have major fiscal consequences, as endless saga of lost chances, failure and policy mis-
taxes from real estate development are an important takes instead.
source of local as well as central government finance. There is at present a substantial lack of clarity
Offices are also a substantial generator of employ- about the exit from the emergency. Since no one
10 EEAG Corona Policy Brief 2020 JulyFISCAL AND MONETARY CONSEQUENCES
can gauge when the crisis will end, the overall ex- Figure 2.2
tent of the fiscal legacy is incalculable. In that sense, Growth Rate of Monetary Aggregate M3 since January 2010
the analogy often made with major wars is accurate: in %
People at the beginning of a major conflict frequently 10
have unrealistically optimistic assessments of the du- 8
ration of hostilities, and the fiscal costs are thus not
6
correctly anticipated.
4
2.2. MONETARY CONSEQUENCES
2
The second uncertainty concerns the monetary con- 0
sequences of the new environment. Central banks -2
everywhere moved to highly accommodative stances. Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
As with the fiscal response, there is little controversy
about the response to the immediate emergency. Source: ECB, Statistical Data Warehouse, last accessed on 14 July 2020. © CESifo
The ECB expanded asset purchases until the end of
2020 under the existing program (APP), and agreed to including high-yield ETFs. The Federal Reserve lends
temporary additional auctions of the full-allotment, money to the SMCCF so that it can buy ETFs. Cur-
fixed-rate temporary liquidity facility at the deposit rently, BlackRock is acting as an outside investment
facility rate and more favorable terms on existing tar- manager for the SMCCF, i.e., it helps select ETFs that
geted longer-term refinancing operations (TLTRO-III) will be purchased by SMCCF. At the same time, Black-
between June 2020 and June 2021. Recently, the ECB Rock is the globally dominant creator and seller of
introduced a new liquidity facility (Pandemic Emer- ETFs. If BlackRock purchases their own ETFs on behalf
gency Longer-Term Refinancing Operations, PELTRO), of SMCCF, it gives it a discount by waiving some fees
at an interest rate that is 25 basis points below the (Tchir 2020). Through this vehicle it becomes possible
average MRO rate prevailing over the life of the for the Fed to, directly or indirectly, own defaulted
operation; and an additional EUR 750 billion asset corporate bonds among other things. This, in turn,
purchase program of private and public sector se- props up company coffers and helps support as-
curities (Pandemic Emergency Purchase Program, set prices, at least for a time. From April 2020, the
PEPP) until the end of 2020. It also announced a ECB accepted as eligible for use as collateral in Eu-
broad package of collateral easing measures for Eu- rozone credit operations “fallen angels,” i.e., invest-
rosystem credit operations in early April. The June ment-grade bonds that have been downgraded to a
2020 announcement of widening of the PEPP pur- rating of at least BB. There had been major outflows
chases took the volume of asset purchases to EUR in March 2020, especially driven by large investment
1.35 trillion (by comparison, the volume of public funds (Lane 2020), and the operation was immedi-
sector bonds acquired under the PSPP since 2014 ately successful in that it preserved the integrity of
amounted to EUR 2.1 trillion). the Eurozone. Viewed in a longer-term perspective,
While most stock market indices in the industrial however, such mechanisms pose a serious moral haz-
world were rising in the past months and others were ard potential because of the difficulty of calling a halt
stabilized at a lower level than before the onset of to operations. The question of formulating an exit
the corona crisis, bond yields on the debt of major strategy is thus acute.
governments have been held down by the large and Monetary aggregates are rising in the Euro Area
highly concentrated central bank purchasing pro- and in the United Kingdom and the United States.
grams, with the Fed in 2020 buying in a few weeks 2020 will see the highest annual percentage in-
the same amount of bonds as in the major QE2 and crease in the broadly defined quantity of money in
QE3 programs. The ECB will probably buy more gov- the United States in peacetime, with the peak figure
ernment bonds than are issued by governments. The above 20 percent and possibly even exceeding 25 per-
calculation of likely developments in 2020 suggests cent (Congdon 2020). Measuring the effects in terms
government debt issuance of some EUR 1280 billion, of inflationary/deflationary impact is extremely hard
compared with the pre-corona projection of around at the outset. Velocity has fallen, as in previous eco-
EUR 875 billion. This is a net new supply of EUR nomic downturns (the effect is comparable to that of
590 billion, i.e., after subtracting bond redemptions. the United States in 2001 and 2008-9).
The central bank will buy around EUR 870 billion in Savings have increased during the shutdown. The
public sector assets, i.e., almost EUR 300 billion more European Commission spring forecast suggested that
than the net issuance of new debt (ING 2020). Eurozone household savings would rise from 12.8 per-
In addition, there are purchases of private sector cent of disposable income in 2019 to a record high of
debt. US companies are helped through the Secondary 19 percent this year and fall only to 14.5 percent in
Market Corporate Credit Facility (SMCCF). It is owned 2021 (European Commission 2020b). The result is a
by the US Treasury and allowed to purchase ETFs, build-up of potential demand.
EEAG Corona Policy Brief 2020 July 11FISCAL AND MONETARY CONSEQUENCES
The collapse of demand has unsurprisingly led benefit from their paper gains, but the consumer price
to major price reductions for a range of consumer response usually follows only after a lag. Influential
goods, including textiles and automobiles. Oil and pe- commentators such as Martin Wolf are now speaking
troleum prices fell by record amounts (with negative about a possibility of a recurrence of 1970s run-away
prices for forward contracts because of the shortage inflation, and a likely combination of inflation and
of storage facilities) before a partial recovery. There stagnation (stagflation). For at least a few months, or
may now be a long period of sluggish demand and even a very few years, however, the tug of war bet
growth, and a generally deflationary environment. ween inflation and deflation may be unresolved, and
Assessments of a long-term low inflation future are policy uncertainty will prevail.
sometimes predicated on a prolonged weakness of The development of securities markets indicates
energy prices (European Commission 2020b) but this a decoupling between the real economy and financial
is already partially being reversed. markets. Some stocks have outperformed – particu-
On the other hand, the collapse of supply chains larly in the tech sector (in the US NASDAQ), which
and a politically driven reversal of globalization is unsurprisingly benefits from the reasonable belief that
likely to make many goods scarce and more expen- the pandemic-inspired turn to IT will be a permanent
sive, including food products, as well as pharma- phenomenon (see Figure 2.3). It is hard to tell whether
ceutical and medical products. Food prices show a the move into securities reflects some investors’ con-
substantial measure of inflation worldwide. There is cept of an inflation hedge, or simply a response to the
likely to be a rapid increase in “felt inflation,” in that accumulation of money balances.
trips to the supermarket are already becoming much If and when the inflationary scenario material-
more expensive. If the structure of demand perma- izes, central banks – including the ECB – will be faced
nently changes because of the crisis, the calculation with a profound dilemma. Unlike the Federal Reserve,
of consumer price indices will need rethinking, as which since 1977 has had what is usually termed a
consumers no longer buy the same sorts of goods. dual mandate, to “promote effectively the goals of
The increases in food prices, moreover, affect poorer maximum employment, stable prices, and moderate
consumers, often additionally impacted by the dis- long term interest rates,” the ECB statutes (Article 2)
appearance of low paid service sector employment, give a clear priority to price stability primary objec-
more severely. While inflation projections for the tive, adding “Without prejudice to the objective of
short term show a deflationary impact of the corona price stability, it shall support the general economic
crisis (the IMF in June estimated consumer prices in policies in the Union with a view to contributing to
industrial countries to rise by only 0.3 percent in 2020 the achievement of the objectives of the Union as
and 1.1 percent in 2020, IMF 2020), there is a possi- laid down in Article 3 of the Treaty on European Un-
bility of an inflation whiplash, in which deflation is ion.” Article 3 of TEU provides that the EU “shall work
followed by sharper rise in inflation. for the sustainable development of Europe based on
Asset prices already look as if they are being balanced economic growth and price stability, a
driven by a monetary overhang, and increased sav- highly competitive social market economy, aiming
ings rates, as the initial post-corona losses have been at full employment and social progress, and a high
reversed. The asset price inflation is also driven by level of protection and improvement of the quality
new investment technologies, with a rapid increase of the environment. It shall promote scientific and
in the popularity of platform-based trading systems technological advance[ment]. It shall combat social
that substantially eliminate commissions, such as exclusion and discrimination, and shall promote so-
Robinhood and Revolut. Major gains in asset prices cial justice and protection, equality between women
historically drive up spending, as investors want to and men, solidarity between generations and protec-
tion of the rights of the child.” Can the ECB simply
Figure 2.3 ignore demands to take action to stabilize output
Selected Stock Price Indices in the United States and Europe for the sake of price stability, especially when the
DAX STOXX Europe 600 Banks FTSE100 definition of price stability becomes increasingly con-
DJIA NASDAQ100 tested? The Federal Reserve is beginning to think
120 Index (2 Jan. 2020 = 100) about taking labor market inequalities (including
100 especially the labor market consequences of racial
injustice) into account in its monetary policy deci-
80
sions (Politi 2020).
60 The most pressing ECB concern will be over in-
terest rates. Any significant rise in interest rates al-
40
ters the calculations of debt sustainability in member
20 countries with high debt levels. The solution to the
European debt crisis after 2015 came above all as a
0
Jan Feb Mar Apr May 2020 consequence of new debt sustainability calculations
Source: Bloomberg, London Stock Exchange, Blackrock. © CESifo that depended on a long-term low rate of interest
12 EEAG Corona Policy Brief 2020 JulyFISCAL AND MONETARY CONSEQUENCES
on the now mostly official debt of the EFSF and ESM If the high inflation scenario is realistic, it would
program countries. There are multiple equilibria: a change policy incentives, and create in particular a
good equilibrium when interest rates are low and great attractiveness to quickly fund as much debt as
debt service is manageable; and on the other side a possible, including very long-term maturities, or even
bad equilibrium with high interest and high defaults as suggested by Giovazzi and Tabellini (2020) and by
both in the public and private sector (and a correla- George Soros, non-maturing permanent debt, mod-
tion between the two in that insecurity about public eled on the very successful British “consols” (Brit-
finance imposes worse terms on private borrowers, ish government consolidated stock) launched in the
who will face a future tax hit). States as well as busi- eighteenth century (which were themselves based
nesses have become dependent on – in fact, addicted on a Dutch model originating in the middle of the
to − a low-interest-rate regime. Just as the Federal Re- seventeenth century, when the instrument was used
serve legislation speaks of moderate long-term inter- to finance dike construction). There is a particular
est rates, there will be a substantial pressure to hold advantage to shifting to a longer maturity structure:
interest rates at a level that continues to allow for a When long term debt is present, the government can
sustainable debt burden. That was a pattern seen in trade current inflation for future inflation by debt op-
the aftermath of the twentieth-century world wars, erations; this tradeoff is not present if the govern-
in particular in the United Kingdom and the United ment rolls over short-term debt. Optimal debt policies
States after the Second World War, when debt man- should minimize the variance of inflation (Cochrane
agement became a key part of the central bank’s task 1998). Before the corona crisis, US Treasury officials
(in a way that it is not in the setting of a modern cen- were discussing the possibility of introducing very
tral bank) (Allen 2018). The wartime analogy suggests long term (50- or 100-year) bonds; a non-maturing
that thinking about debt management will come back instrument is only a logical extrapolation of that idea.
– that policy reflection may become fiscal dominance Such instruments can, however, only be issued by
(Gordon and Leeper 2006). In addition to the fiscal very secure borrowers; if there is any doubt as to the
dominance, thinking about the effects of monetary credibility, they would not be likely to find much of
policy on the financial sector will also come back, so a market. The ECB, without an adequate long-term
that financial dominance will come alongside fiscal fiscal arrangement, would simply look like a version
dominance (Brunnermeier 2016; for a historical ex- of the post-World War I German Reichsbank. Small
ample in 1920s Germany see James 1998). European countries, or emerging markets, will not be
Any substantial increase in interest rates would able to access this type of instrument. The proposal
lead to a rapid move away from the fixed yield instru- thus depends on a very radical move to some form
ments, and government financing will become much of debt mutualization in Europe, a move for which
more expensive. That outcome would see a return to there is perhaps no political appetite. The European
the Euro debt crisis of the early 2010s. However, cir- Commission project for EUR 750 billion borrowing re-
cumstances would likely be much worse than at that lies on an idea of only moving quite gradually to the
time. It is now Italy, the third largest European econ- market and launching a tax that would not deliver a
omy that faces a severe economic and fiscal crisis. funding stream until 2027.
Furthermore, if the fights observed in recent months At present, however, there exist multiple plausi-
are any indication, Eurozone governments may have ble scenarios. Some see a possibility of a return to
a hard time agreeing on a coherent set of measures the 1970s, in which central banks worried about in-
that would have sufficient bite in handling the cri- flation are engaged in a struggle with governments
sis. The Covid-19 pandemic initially looks as if it may concerned with keeping debt financing costs down,
have served populists and nationalists among Euro- a struggle they would probably lose as governments
pean and global leaders and politicians well, mak- insist on their higher political legitimacy (fiscal dom-
ing it easier for them to sell my-nation-first types of inance). Based on this scenario, when the gap before
pseudo-solutions to the scared and confused public. the onset of inflation is short-lived, the issuing of
Moreover, the overall levels of debt are higher than long-term debt looks like an opportunity to surprise
before and the expected drop in economic activity investors with unanticipated inflation, an exercise
across Europe much stronger. In addition, the ECB is which redistributes wealth from governments (where
under pressure from the German Constitutional Court debt is a liability) to investors (where debt is an asset).
regarding its current and potential quantitative easing Under such a scenario, however, unpleasant conse-
programs. Under such circumstances, the European quences follow. The holders of government debt may
banking system, under pressure ever since the Global be banks and insurance companies, whose balance
Financial Crisis, may encounter renewed strain as sheets would be threatened by an eventual surge in
much of its assets are held in European government yields and fall in prices if central banks would attempt
bonds. As an indication of potential serious trouble, to normalize interest rates in Volcker-style disinflation.
one can see that European banking stocks are now In that case, the exit from the low-interest-rate regime
worth only around 60 percent of their January 2020 might involve a financial crisis, possibly requiring new
value (see Figure 2.3). government bailouts.
EEAG Corona Policy Brief 2020 July 13FISCAL AND MONETARY CONSEQUENCES
Alternately, in a different scenario, the low-infla- plained (correctly, from a legal perspective) that the
tion, low-growth setting might be durable. But that central bank was “not here to close spreads” between
scenario is fraught with dangers as well. The worry the borrowing costs of member states. She rapidly
about a resurgence of inflation or a clash between needed to walk that statement back. The central bank
central banks and governments would then be un- is thus locked into an effective interest rate guarantee
realistic (or unrealized). The debt-to-GDP ratio rises – for the moment. A fundamental, and highly political,
because of low nominal GDP growth, and the prospect question will arise the moment that policy is tested
of an eventual debt crisis increases. The low returns by substantial price movements, if those are identi-
on secure government assets drives investors to un- fied as long-term trends rather than a response to a
dertake more risky investments in search of higher short-term supply shock.
yield, thus raising a different risk of financial crisis.
A new asset bubble emerges as in the Greenspan REFREENCES
years. The low-yield environment penalizes pension Allen, W. A. (2018), The Bank of England and the Government Debt:
funds and pensioners find that their expected income Operations in the Gilt-Edged Market, 1928–1972, Cambridge: Cambridge
University Press.
is unrealizable. They may push to have the shortfall
Bruegel (2020), The Fiscal Response to the Economic Fallout from
compensated by the government. In this scenario, too, the Coronavirus, https://www. bruegel. org/publications/datasets/
higher demands for payments from the government covid-national-dataset/.
(transfer payments) are an outcome. Brunnermeier, M. K. (2016), Financial Dominance, Rome: Banca d’Italia.
The substantial provision of guarantees as a re- Cochrane, J. H. (1998), “Long-term Debt and Optimal Policy in the Fis-
cal Theory of the Price Level,” NBER Working Paper No. 6771.
sponse to the corona crisis holds another potential
Congdon, T. (2020), Newsletter, June 2020.
danger. Guarantees in some European countries might
European Commission (2020a), Financing the Recovery Plan for Europe,
be called on, leading to a fiscal cost, while in other May 27, 2020.
countries the purpose of the guarantee in simply pro- European Commission (2020b), European Economic Forecast Spring
viding a safety net that avoids a bad equilibrium suc- 2020, https://ec. europa. eu/info/sites/info/files/economy-finance/ip125_
en. pdf (accessed July 13, 2020).
ceeds and there is no fiscal cost. The question then
Fleming, S. (2020), EU Budget Chief Seeks Backing for Business Levy to
arises regarding how the cost is allocated between Fund Recovery, Financial Times, May 31.
these countries. This is a scenario that looks back to Giavazzi, F. and G. Tabellini (2020), Covid Perpetual Eurobonds: Jointly
the Euro debt crisis in the eventuality that northern Guaranteed and Supported by the ECB, VoxEU March 24, 2020.
Europe experiences a rapid rebound (a V-shaped re- Gordon, D. B. and E. M. Leeper (2006), “The Price Level, The Quantity
Theory of Money, And the Fiscal Theory of The Price Level,” Scottish
covery) while southern Europe is plunged into a re- Journal of Political Economy, 53(1 Feb), 4-27.
newed structural crisis (an L-shape trajectory). ING (2020), Supply, Rates and Curve: What to Expect in 2H20 and Be-
A risk to government debt is thus a risk of reviving yond, July 7, 2020, https://think. ing. com/articles/rates-outlook-sup-
ply-qe-and-re-steepening-curve-what-to-expect-in-2h20-and-beyond/
the “doom loop” that gripped Europe in the Eurozone (accessed July 13, 2020).
debt crisis. The doom loop had two components, one International Monetary Fund (2020), World Economic Outlook Update,
fiscal and another macroeconomic. The first was that June 2020.
banks held large amounts of government debt as as- James, H. (1998), “Die Reichsbank 1876 bis 1945”, in (ed.) Deutsche
Bundesbank, Fünfzig Jahre Deutsche Mark: Notenbank und Währung in
sets, so that a collapse in debt prices eroded their
Deutschland seit 1948, Munich: C. H. Beck, 29-89.
solvency and ultimately required recapitalization by
Lane, P. (2020), The Market Stabilisation Role of the Pandemic Emer-
the government (adding to the fiscal strain). Second, gency Purchase Programme, ECB blog, June 22, 2020,
other assets of the banks suffered as the economy https://www.ecb.europa.eu/press/blog/date/2020/html/ecb.
blog200622~14c4269b9e.en.html.
shrank; but the likelihood of a higher fiscal burden
Politi, J. (2020), Focus on Racism and Income Inequality Signals Evolu-
in the future to deal with the cost of bank recapitali- tion in Federal Reserve’s Thinking, Financial Times, June 20, 2020.
zation also weighed on economic growth. Fiscal and Tchir, P. (2020), Hertz, High Yield ETFs and the Fed, Forbes, May 25,
monetary measures are needed to avoid a new shock 2020.
of the kind that became evident in the notorious press Wolf, M. (2020), Why Inflation may Follow the Pandemic, Financial Times,
May 19, 2020.
conference when ECB President Christine Lagarde ex-
14 EEAG Corona Policy Brief 2020 JulyYou can also read
