Dear Andrea,

Already today (June 2020), many economic data confirm the thesis that the impact of the SARS-CoV-2 Coronavirus pandemic causing Covid-19 disease on the global economy is very large. The high probability of potential economic recession in many countries in 2020 is currently estimated. Due to the development of the SARS-CoV-2 coronavirus pandemic causing Covid-19 disease, many companies, enterprises suspend operations or entrepreneurs are closing their companies and service facilities in an increasing number of sectors and industries. Therefore, in the first half of 2020, economic growth slowed down strongly in many countries. Therefore, it is necessary to permanently improve and increase the scale of anti-crisis socio-economic policy planned, developed and implemented both at the level of individual countries as well as within coordinated international activities. In some countries, pro-development, interventionist, anti-crisis programs have already been launched to save business entities from mass bankruptcy by introducing additional temporary tax breaks or exemptions, subsidies to employees' remuneration under fiscal policy. On the other hand, as part of monetary policy, central banks reduced interest rates, launched loans for commercial banks on preferential terms, purchased lost loans from commercial banks and / or implemented programs to buy back Treasury bond secondary market to maintain liquidity in the commercial and public financial system of the state. However, the question arises how many months of this type of high budget aid programs can be implemented? For how long will the financial resources derived from the public finance system last, how long can such an active, anti-crisis socio-economic policy, including fiscal policy, be conducted? Can the current economic crisis in many countries turn into a crisis of public finances? If it is possible, what anti-crisis economic reform program should be currently planned and implemented in these countries to avoid a significant increase in the risk of potential loss of liquidity in the financial system of the state? The issue of the impact of the development of the SARS-CoV-2 Coronavirus pandemic on national economies discussed above is developmental, dynamically developing, with every day more important data appear that may affect the specificity, nature and scale of the correlations analyzed. In view of the above, answering the above questions I conclude that in both the USA and the European Union analogous anti-crisis solutions have been used in many issues, including central banks have reduced interest rates, anti-crisis, interventionist fiscal policy is being applied and the level of public debt will increase to levels of increased risk of a decrease in financial credibility and security of the public finance system. After the end of the pandemic, in a situation of low economic growth, the aforementioned anti-crisis, interventionist socio-economic, fiscal and monetary policy will be conducted for a minimum of several months, several quarters and perhaps for a longer period. However, after some time, when the economy comes out of the crisis, including a significant improvement in economic growth, the said policy will be modified in such a way as to improve the state's finances, public debt could be successively reduced to a low risk of a potential financial crisis. I researched analogous processes and applied instruments of fiscal and monetary policy in relation to the global financial crisis of 2008. The conclusions of the research I published in scientific publications that are available on the Research Gate portal. I invite you to scientific cooperation.

Best Regards, Have a nice day,

Dariusz Prokopowicz

Thank you Dariusz for picking up the discussion and for your kind proposal :-)

In a nutshell, you deem that there will be a smooth adjustment, based on the experience of the 2008 crisis. I tend to agree with you, albeit in that specific case recovery was hampered in some countries by the need of a prompt fiscal adjustment.

I was thinking especially about Europe. While no country is willing to tighten the rules now, tensions might arise in the mid term, when countries where recovery has been steadier (and, thus, in a better fiscal position) might feel like asking the others to adjust, and/or push for a less accomodating monetary policy, including ECB interventions on public and corporate securities.

Kind regards

Andrea

Dear Andrea,

Most economists agree that the world economy already faces an economic downturn worse than the Great Depression. IMF expects the global economy to contract by 3% in 2020. The World Trade Organization said that global trade will contract by between 13% and 32% this year. The Organization for Economic Coordination and Development has also warned the economic hit from the virus will be felt “for a long time to come. This is a crisis like no other.”

The latest forecasts from the IMF suggest that the U.S. economy will contract by 5.9% this year. In comparison, the euro zone is expected to shrink by 7.5%, but China is seen growing by 1.2% in 2020.

Kenneth S. Rogoff, a Harvard economist, said “This is already shaping up as the deepest dive on record for the global economy for over 100 years. Everything depends on how long it lasts, but if this goes on for a long time, it’s certainly going to be the mother of all financial crises.”

This crisis is different. The COVID 19 pandemic disrupts normal economic activity and life around the world. Quarantine measures imposed by governments and social distancing limit both aggregate demand and aggregate supply.

Central banks in many countries around the world have taken decisive action to reduce interest rates, repurchase assets and provide liquidity to financial institutions to counteract deteriorating financing conditions and support the lending process. The central banks of the United States, Britain, the euro area and Japan have already announced a buyout of assets worth $ 6 trillion. The ECB has launched the Pandemic Emergency Purchase Program, which will cover the redemption of public and private securities.

Governments are taking fiscal measures both to support demand and to mobilize resources for health care and to help people and businesses survive in overcoming untypical crises caused by emergencies.

Since the beginning of the current crisis in all countries of the world, the IMF estimates the value of of COVID-19 fiscal stimulus packages - additional government spending and deferrals - at $ 3.3 trillion. In addition, other liquidity provisions and guarantees are estimated at $ 4.5 trillion.

A side effect of the anti-crisis fiscal policy was the rapid growth of public debt. According to the IMF, the public debt of all countries in 2020 will increase by 13.1% of GDP and reach 96.4% of GDP, including in emerging markets - 62% of GDP. In the USA the deficit is now expected to be $3.7 trillion for fiscal year 2020, or 17.8 % of GDP. In Ukraine, public debt is expected to grow by 16.4% of GDP this year and reach 66.5% of GDP by the end of the year. Public debt is projected to rise to levels not seen since the conclusion of World War II. Existential threats call for hitherto unimagined levels of public spending.

The post-World War II experience shows that high debt levels need not lead to a crisis. Debt relative to GDP rose from 43.6 percent in 1940 to 106% by 1946. But the aftermath of the war saw no fiscal crisis, and in the 35 years that followed, the ratio of debt to GDP fell to 28%. A significant reason for the post-World War II decline in the debt-to-GDP ratio was the general tendency for interest rates to be below the economic growth rate, so that GDP rose faster than the interest rate on the outstanding debt. Higher economic growth also helps reduce deficits, and contribute to lower debt, through higher tax receipts and less spending on social programs. Low interest rates relative to growth led to a declining ratio of debt to GDP.

Ballooning public debt inspires legitimate concerns. But there are also risks associated with pulling back fiscal efforts too early. This will hinder recovery and in some cases create new downturns. Governments need to continue to provide support to survive this crisis. Strong responding to the present crisis carries small risks and relatively low costs compared with a response that falls short. Therefore, interest rates will likely remain near zero until full employment, inflation come back, at least in the near to medium term.

Sincerely,

Iryna Kondrat

Dear Iryna,

thanks for your mindful reflections.

It is nice that you have in mind the Ukrainian historical experience with government debt just as I had in mind the Italian one. In this latter case, WW2 had the opposite impact, with inflation wiping out the real value of debt and bringing its ratio to GDP to about 26% in 1947, its all-times low. Instead, adjustment to the 2008 slump required a prolonged effort for modest results: the weak growth performance was compounded by an adverse (and nil inflation) context of soaring interest rates on debt renewal issuances, requiring fiscal policies that in turn contributed to depress domestic demand.

I agree with you and Dariusz Prokopowicz that this new round of rush to debt apparently will not bear the same consequences, considering the management instruments which are being put in place at the international level.

When launching the debate, I considered two types of risk.

1. In the mid term market pressure on poorly performing economies (I mentioned Italy, but it could be in good company) might require a prolonged contrast by EU institutions, which cannot be given for granted.

2. In the USA, policy is in a better position to alter the game setting. I assume it woud push for a weak dollar while keeping real interest rates low. Nominal rates, however, might go up if by depreciation and other means they manage to also increase inflation, if their efforts are crowned by growth. This in turn might entail higher real rates in the EU, assuming a lower inflation here.

All this reasoning, of course, does not take into account impacts on RoW, and possible actions and feed-backs.

Cheers

Andrea

Dear Andrea, dear all,

Negative interest rates do not automatically remain low. In fact, it was only through an innovative measure, namely the introduction of NOMINAL negative interest rates on deposits, that your fellow countryman Mario Draghi ensured that some states can now finance themselves at negative rates. Italy, which urgently needs negative interest rates, is unfortunately not yet one of them. (Apart from that, however, Italy should also make its wealthy and landowners more aware of their responsibilities and rethink its pension system.)

Mario Draghi has acted very wisely and we can be grateful to him for this paradigm shift! But it is still not enough, because we are still confronted with the dodge in cash, the hoarding. The increasing "circulation" of cash is driving the growth of the money supply and is still being played down. The Euro-area would do well with one tenth of the amount of cash.

A "general tendency for interest rates to be below the economic growth rate, so that GDP could rise faster than the interest rate on the outstanding debt" is no longer realistic in times of ecological problems and economic saturation in industrial nations - we urgently need to complete the paradigm shift now! A recession of -10% or more therefore now requires very strong negative interest rates. Here you will find my plea:

https://www.fr.de/wirtschaft/gastwirtschaft/gastwirtschaft-her-mit-negativzinsen-13795016.html

There are also good proposals from Swedisch economist Roger Svensson:

https://www.expressen.se/debatt/gesell-pengar-kan-fa-fart-pa-hela-ekonomin/

and from David Andolfatto of St. Louis Fed:

https://www.stlouisfed.org/on-the-economy/2020/may/hot-money-credits-kick-starting-economy

Kind regards

Beate Bockting

As part of socio-economic anti-crisis policies, interventionist budgetary, fiscal, monetary, etc. policies implemented in order to activate economic growth and quickly recover the economy from the economic crisis caused by the SARS-CoV-2 Coronavirus pandemic (Covid-19 disease causing) so-called Anti-crisis shields. In some countries, due to the use of high-budget Anti-Crisis Shields, the level of public debt will increase to the maximum security thresholds of the public finance system and sometimes also in terms of credit and systemic security in commercially operating financial systems, including banking systems. Therefore, if similar economic crises would be repeated in subsequent years, unfortunately the possibilities of financing subsequent similar Anti-Crisis Shields will be much more limited than those currently launched and implemented in the months March - June 2020. This issue concerns many countries, including also some countries in the European Union and other regions of the world.

Greetings,

Dariusz Prokopowicz

I think this is an excellent question.The Coronavirus is an extraordinary negative shock in the world economy. Governments cannot have second thoughts to how far should pursue fiscal and monetary policies. During these extraordinary circumstances governments must pursue Keynesian policies to makeup what the private economy is not doing. If private consumption and investment decline and international supply chain is interrupted governments are responsible and obligated to pick the slack and they are doing so. The EU although initially hesitant now is leading the way. There are plenty of crucial areas where public expenditure can and must be directed. Medical research is the most important since only a medical breakthrough will resolve the pandemic to take us back to normal times.

Governments among other things should subsidize worker wages through a variety of programs. As for the concerns whether public debt will increase, of course it will, but this is not a problem. The problem is to fight and win the pandemic. US fiscal and monetary policy during WW II and during the Great Recession provides a clear answer whether countries need to be concerned about large public debt.

US doubled its public debt-to-GDP ratio from 60 to 120 percent during WW II and again during the Great Recession(2007-2009) public debt-to-GDP ratio increased from 60 percent to over 100 percent but began leveling off prior to the pandemic.

I both cases the US fought extraordinary events successfully with extraordinary fiscal and monetary policies.

Dear Andrea,

Though most stock markets (and oil prices) have nosedived recently, the transitory effects will have prolonged impacts on economies and companies’ earnings because of Covid-19 pandemic and health crisis.

This is also evidenced by the fact that the Fed decreased very recently interest rates to zero levels and the markets keep nosediving. This is an indication that markets are already far sighting and factoring the long-term impacts of current world events because of Covid-19 pandemic and the resultant health crisis.

I am afraid, but current world events will have major impacts on countries and companies’ earnings, which will definitely led to many bankruptcies worldwide.

The recovery from the economic impact of the Covid-19 health crisis will take lot of efforts and prolonged period of time.

Prof. Dr. Mazin A. M. Al Janabi

Full Professor of Finance & Banking and Financial Engineering

EGADE Business School, Tecnologico de Monterrey,

Santa Fe Campus, Mexico City, Mexico.

Andrea de Panizza

https://www.pewresearch.org/fact-tank/2020/04/29/coronavirus-downturn-likely-to-add-to-high-government-debt-in-some-countries/

Dear,

I hope you think about restrictive policy in a public debt area. In my opinion, this will not happen. I expect that governments, at least in euro area, will have more feelings for hard times that the most economy will have in a near future. We can expect more looser fiscal policy not just because of COVID-19 but also for other economics situation (low inflation, low interest rate, low GDP growt etc.). Policy makers emphasize necessary stronger cooperation between fiscal and monetary policy, maybe we will see that cooperation now.

The second question was about interest rate. I expect very low interest rate in a long run. ECB introrduce very hard quantitative easing, but the same policy we can see in Japan, USA and England. Quantitative easing policy is not new - we live with that policy last 5+ years, but we cannot see significant improvement in interest rate, inflation or GDP growth. There are a number of other factors that maintenance very low interest rate - structural factor not cyclical. Structural factors such as population aging, low productivity etc. are some of factors that leads to very low natural interest rate. COVID-19 just worsen situation, but even without COVID-19 interest rate in Eurozone would be very low and negative for longer period of time.

Thanks Shakhaowat for the article and thank you Tijana for your mindful views on "question 2" (interest rates). on Q1, it is true that the past crisis gave a push to European institutions towards a real union.

At the same time, this increased hostility by part of the public opinion. In countries facing restrictions, because they were unduly seen as the cause. In countries which somehow fared better, because the value of getting closer with neighbours not in equally good conditions lost some appeal... This might endanger solidarity.

I also share the fear of Mazin, that the consequences of this crisis might be lasting over time.