The coronavirus pandemic is bad for business. Local lockdowns, restrictions on social gatherings and travel disruptions have slowed economic activity, cut off supply chains and forced companies to furlough or lay off workers. So far, injections of government cash have kept many sectors afloat. But with further lockdowns and restrictions all but certain and government support scheduled to end, the economic outlook in Europe is looking dire.
How bad is it likely to get, and what can be done to minimize the damage?
Do capitalism differently
Mariana Mazzucato is a professor at University College London, and the author of “The Entrepreneurial State: Debunking Public vs. Private Sector Myths” (PublicAffairs, 2015) and “The Value of Everything: Making and Taking in the Global Economy” (PublicAffairs, 2018).
What happened after the 2008 financial crisis cannot happen again. Back then, governments injected more than $3 trillion into the financial system but failed to direct that liquidity toward good investment opportunities. As a result, most of the money ended up in the financial sector — instead of supporting the real economy — and taxpayers were left with the same broken, unequal, carbon-intensive economy as before.
Now, in response to COVID-19, governments are again flooding the market with liquidity — but this time they must lay the foundations for an inclusive, sustainable recovery. Some are already structuring their assistance to ensure a symbiotic relationship with the private sector. The French government, for instance, has made bailouts to the automobile and airline sectors conditional on reducing carbon emissions, and the Danish government has refused to rescue businesses using offshore tax havens.
These are good first steps. But we must set our ambitions even higher, using the recovery to do capitalism differently.
Governments need to attach smart conditions to bailouts that protect public interests, such as measures requiring companies to retain workers or prohibiting share buybacks. They must also govern public-private partnerships, ensuring that the rewards of public investment — such as funding the research and development of a COVID-19 vaccine — are returned to the public instead of handed over to the private sector. This requires governing intellectual property so that it fosters collective intelligence and not private rents.
We also need more ambitious investments in underlying health systems and public-sector capacity. This is the opposite of what is happening in countries like the United Kingdom, where such capacity is increasingly outsourced to consulting companies.
If we don’t fix the problems that have destabilized our economy for decades, we will continue to go from crisis to crisis. The time for change is now.
Revamp Europe’s social contract
Miguel Otero-Iglesias is a senior analyst at the Elcano Royal Institute in Madrid.
The economic effects of Europe’s battle against the coronavirus are close to those of a full-blown war: Our liberties are curtailed, traveling is reduced, fear is widespread and consumption and investments have been subdued. We can’t afford to treat the situation like we would any other macroeconomic recession. For all intents and purposes, we are at war, and we don’t know whether it will last a year, two years or more. We know when wars start, but we never know when they will end.
As the months have gone by, countless businesses have closed and unemployment has risen. Europe urgently has to take action.
First, stick together. We know that countries that pull together perform best in the long run.
Second, worry about winning the war against the virus, not the rise in national debt. Build an adequate health response with strong primary and hospital care; invest in testing, tracing and isolating capacities; and keep cash flowing to workers and companies.
Third, create a solvency procedure to decide which companies are illiquid but solvent and which are insolvent and need to go. Keynes needs to meet Schumpeter. Banks and states will have to work together.
Fourth, use this crisis to make your country more resilient and fair. Use spending to further long-term goals that are green, digital, inclusive and innovative.
Finally, make a mid-to-long-term plan for reducing the debt overhang via higher growth, slightly more inflation and an increase in taxes for those at the top. In other words, Europe needs a new post-war social contract.
Invest in the future
Valdis Dombrovskis is executive vice president of the European Commission for an economy that works for people and European commissioner for trade.
With a growing number of EU countries facing a second wave of the virus, we know that difficult months lie ahead. Workers will be hit hard as restrictions are put in place to contain the pandemic. They, and the companies they work for, will need maximum support.
The good news is that we know much more about the virus than we did at the start of 2020. We are better prepared when it comes to medical care and protective equipment, and there is good progress in developing a vaccine that will be made available to many millions of people.
Still, we can’t underestimate the toll the pandemic is having on our economies. As long as the health emergency lasts, we know we must continue to give unprecedented support to companies and workers.
At the EU level, our priority remains the same: protect people’s lives and incomes, keep businesses afloat and support the broader economy. The safety nets we established during the first phase of this crisis are still available and we encourage countries to make as much use of them as possible.
Looking ahead, we are focused on potential for economic growth. Our recovery plan, Next Generation EU, is designed to spur reforms and investments that will generate growth and jobs, and to make our economies more digital and climate-neutral.
Meeting this challenging moment is also an opportunity for transformation. Countries that want to use the EU recovery fund will need to present plans that move their economy in that direction, with at least 37 percent of spending on climate and at least 20 percent on digital.
To make the most of these funds, which are expected to start flowing in 2021, countries will also have to tackle inefficiencies in their public administrations and improve their business environment. This is how we can build back our economic strength, and build back better.
Ditch austerity
Rebecca Christie is a visiting fellow at Bruegel.
COVID-19 is a global killer. Austerity needs to succumb.
As long as governments are willing to find the money to backstop their economies, Europe has a chance at containing economic damage while the medical threat is front and center. If, however, old fears about inflation and the general evils of high debt come back to the fore, the EU risks cutting its own lifeline.
We know the virus doesn’t respect borders. It would be a pity if politicians used European negotiating venues to seek limits on their peers, rather than creating conditions in which all can prosper.
Global markets have shown that they are willing to invest in high-quality European debt. Meanwhile, inflation has fallen so low that more of it would be good for the economy, not a danger. While it’s possible to conceive of a time when those two conditions aren’t baked into the outlook, it’s not a near-term threat in the way that anti-borrowing philosophies might be.
The European Central Bank has so far been able to stand firm in its commitment to support the economy and lift inflation back up to target. Politicians need to support this effort and independently pursue fiscal paths that, as the ECB’s Isabel Schnabel said, serve as a complement to what monetary policy can offer.
Racism and xenophobia are the other big accelerators to worry about. Voters in the developed world have a disconcerting history of limiting social welfare when their nativist fears are triggered. Policymakers who want a healthy population and a healthy economy need to make sure they are creating conditions for the health of all of their citizens, not just the white ones.
Spend smart
Silvia Merler is head of research Algebris Policy & Research Forum.
The economic impact of reimposing tight lockdowns at a time when economies are still in recession and emergency public support is on the verge of being phased out in some countries will be high. Another plunge into lockdown carries the risk of disastrous consequences on output, employment and economic potential.
Enforcing social-distancing and mask-wearing, incentivizing teleworking in sectors where it is feasible and safeguarding critical social spending toward vulnerable groups are all key to avoid a painful hit to economic activity and social cohesion in the immediate term.
To ensure resilience on a longer horizon, governments will have to plan carefully how to spend the resources made available via the EU’s €750 billion recovery fund. The smartest way forward would be to prioritize investment in areas that can put the economy on a path to higher potential growth, such as education and training, research, digital, and green infrastructure.
Prioritize long-term success
Creon Butler is director of the global economy and finance program at Chatham House.
It didn’t have to be this way. China, South Korea and New Zealand have all managed to find ways to suppress, contain or even eliminate the virus. They are now reaping economic and social benefits.
As we try to get on top of the virus again, we should be asking three questions: What went wrong the first time? How can we ensure it will be different this time? And what is the long-term strategy to restore our way of life without being hostage to the uncertainties of vaccine development?
The answers will inevitably differ between countries, but three common elements are certain.
First, governments need to rebuild trust by providing an honest explanation of why the first round of lockdowns failed and start communicating quickly and openly with the public.
Second, they need to set out a clear and credible strategy focused on suppressing and eventually eliminating the virus. This is as much an economic necessity as it is a health imperative.
Individually, our goal should be to minimize our total close contact with others, while prioritizing those contacts that are most important to us. Collectively, we need to prioritize those activities that are most important to the long-term success and stability of our societies, such as school and university education.
Governments must also spend generously and equitably — as many did at the start of the crisis — to provide financial support to those who have been forced to stop working through no fault of their own. They need to fix urgently “track-and-trace” systems, even if this means rebuilding a failing system from scratch, and to accelerate economic and social adaptations (such as enabling infection-free international travel, holding socially distanced school exams or addressing the mental health crisis).
Third, governments must take action decisively, and, where the science indicates, pre-emptively. They must publish and then stick to clear and transparent metrics, share information to the fullest extent with local and regional governments and, wherever possible, make decisions collaboratively.
Kicking the can down the road is not an option.
Leave room for renewal
Megan Greene is an economist and senior fellow at Harvard Kennedy School.
The shape of the economic recovery will be determined first and foremost by the trajectory of the virus. With new COVID-19 cases spiking across Europe and additional restrictions imposed in many countries, a slowdown has already begun. But economic policy determines the shape of the recovery, too.
The expiration of fiscal measures such as the furlough scheme in the U.K. and the sales tax cut in Germany is inappropriate in the face of a second wave. Government policies to mitigate the impact of the virus on workers and firms should still be viewed as catastrophe mitigation rather than fiscal stimulus.
Still, there is a balance to be struck. Governments should extend fiscal support to avoid a wave of insolvencies, which could prompt a downturn. But policymakers must be careful not to prop up so-called “zombie” companies and keep workers attached to firms and industries that are realistically never coming back. After a major economic dislocation, old firms are typically wiped out and replaced by new, more productive entrepreneurs — creative destruction, in economic parlance. If too much fiscal support is offered for too long, this process of renewal and growth is undermined.
In addition to maintaining support at the domestic level, policymakers must get the EU recovery fund off the ground. It represents a potential lifeline for countries with little fiscal space to immediately respond to the crisis.
With real yields negative across Europe, it should be a no-brainer for governments to borrow to support workers and small companies and avoid a recession in the face of a second wave. Doing so with a longer-term perspective makes even more sense: National and European institutions should support infrastructure projects that retool the economy for sustainability, generating high wage, high-hour jobs, boosting consumption and investment and addressing climate change — one of the biggest challenges of our time.