The economics of coronavirus (II)

The economics of coronavirus (II)

by Pininvest Analysis

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Pandering to public opinion by ‘circling the wagons’ and hoping to provide solace and security, tucked away behind sovereign borders, the politics of coronavirus unwittingly bring down decades of multilateral economic cooperation, already badly fractured by the chauvinism of some of the world’s leading nations

Cooperation between countries rely as a matter of course on sometimes awkward compromise, the advantages of which far outweigh its ambiguities, but when a crisis rips through the wand of understandings and lays bare naked interests, defiance runs like wildfire

Confronting very different challenges inherited from their political and institutional history, Europe as well as America will need to seek a path to rebuild the trust of their constituencies, a tall order amidst tone-deaf warring self-serving interests but a vital one

This is why the post-crisis era purports radical transformation for the members of the European Union as well as for America’s social security system

Whether either institutional arrangement  have already gone beyond breaking point remains to be seen….

 

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The governments caught up in the pandemic doubled down on quick response economic commitments supporting business and workers

Tactical rather than strategic, financial credit guarantees and cash payouts dwarf the economic countermeasures following the 2008 financial crisis and still hardly qualify as ‘policies’

Delivered to beneficiaries within national borders, the support promised by governments denies in more than one sense the benefits delivered by international trade over the years, which lifted millions people out of poverty, spreading the benefits of education for girls and boys, and strengthening public institutions with the promise of prosperity

Pandering to public opinion by ‘circling the wagons’ and hoping to offer solace and security tucked away behind borders, the politics of coronavirus unwittingly bring down decades of multilateral economic cooperation, already badly fractured by the chauvinism of some of the world’s leading nations

 

The World Trade Organization’s (WTO) most optimistic 2020 scenario anticipated a drop of 13% in global trade as the virus took hold, but gloom is setting in : a plunge of more than 30% in global trade, a realistic scenario today, would cause unfathomable damage around the world, well before the end of the pandemic

Seemingly oblivious of the danger and confident in their ability to sail through the storm, the world’s strongest economies double down on ambitious national economic policies

Highlighting the gap with their weaker partners, and most dependent themselves on international trade to secure their preeminence, the confidence of the world’s economic leaders may be short lived

 

Europe, looking  unstuck

As of April 1, Germany's parliament unveiled a coronavirus rescue package, green-lighting almost €1.1 trillion to shield Europe's largest economy from the impact of the pandemic, with a mix of €400 billion to guarantee company debt, €100 billion in lending facilities (or financing stakes) benefitting companies and additional facilities for the state-owned investment bank KfW (now able to guarantee more than €800 billion in lending)

The measures combine with short-term work benefits, as during the financial crisis of 2008/2009, a facility allowing companies to send their employees into short-time work (Kurzarbeit) at 60 percent of their wages and 67 percent of those with children paid for on public funds and expected to involve more than 2 million people

Quoted by Reuters, Reint Gropp, head of the independent economics think tank Leibniz Institute for Economic Research suggests the €750 billion ($834 billion) package (presumably part of the €1.1 trillion global allocation) to soften the economic impact of the coronavirus outbreak on Europe’s largest economy will last for about two months…

In stark contrast, the funds made available by the other EU members betray analytical confusion and disparate short-termism but, perhaps more ominously, the weak borrowing power and dismal financial profile of just too many…

 

And when they do commit to broad-based support to assist companies and protect workers, the financing remains obscure (or wishful thinking?) such as the €200 billion ($219billion) announced by Spain (but leaving €83 billion of the total to private business) or the $400 billion state-backed loans on offer in the UK (15% of annual GDP) or the €300 billion loan guarantee in France (topped up by a €45 billion aid to small business and an open-ended commitment to fund 80% of salaries)

Italy’s financial straits – limited to €28billion funding, hardly credible for the EU’s third largest economy…- came to light, unvarnished, in the fiery exchange between Prime Minister Conte and the Dutch Premier Rutte, the later standing in for fiscal conservative North

 

With €750 billion new credit lines, on top of existing programs, the European Central Bank will provide the equivalent of 9% of Eurozone GDP with financial drawing rights of €1 trillion, allowing its members to make their national commitments whole…The bank gave itself additional flexibility by allowing Treasury purchases from countries such as Spain or Italy beyond their ‘capital key’ (their portion of bank capital which stands at 25%...) and even increase holdings beyond its standard ‘issuer limit’ (a third of any member’s sovereign debt)

What the ECB does not – and could not – address is the risk to see, once again (after the 2009-2015 debt crisis), weak banks loaded with sovereign national debt dragged down by the weakness of that debt – and Italy is not alone in facing such a dismal development

 

The half-way house of the European banking union set-up in 2012 (a common supervision and resolution framework for large banks) will not withstand the torrent of new debt issues, putting – once again – a collective European debt insurance on the table

Understandably focused on the potential exposure of their taxpayers to risky loans made by southern banks (and their governments), the Netherlands, Germany (foremost) and Finland have been rejecting EU sovereign-exposure regulation, as a matter of principle

Serving domestic purposes, this posture may be ignoring the existential crisis in the making at the peril of their proponents

The European €540 billion economic support measures announced on April 9, 2020 squeaked through by including a €240 billion option allowing contributing Eurozone members to access the European Stability Mechanism (ESM) for healthcare-related expenditures, in proportion their capital share and – as a matter of course – counted as country debt

Hardly a response to Italy’s (and Spain’s) dismal economic outlook and a far cry from credit pooling, known to be indispensable… but of course a convenient credit facility of the Fund’s largest contributor, Germany

The rift within the Eurozone is cast for all to see in the hard cash commitments to the economy, made by some, out of reach for others – tearing the EU to breaking point and possibly beyond, as we hope to discuss shortly in ‘die nervöse Grossmacht’

 

America, looking inward

Ainsi, la première chose que la peste apporta à nos concitoyens fut l’exil. …Oui, c’était bien le sentiment de l’exil…cette émotion précise, ce sentiment déraisonnable de revenir en arrière ou au contraire de presser la marche du temps…

So the first thing the plague brought to our fellow citizens was exile. ... Yes, it was the sense of exile ... this precise emotion, this unreasonable feeling of going backwards or on the contrary to press the march of time...

Albert Camus – La peste (II-1)

 

The last country to seek light in darkness, also the most exposed as of this writing, is America, where a $2trillion fund – with a few twists to a similar mix of company support and family aid – is already deemed insufficient (at 3% of GDP, where the funds allocated during the 2007-2008 financial crisis amounted to …$800 billion)
…with no end in sight to the health crisis

A 240 000 loss of life is bandied around by the US Administration against very significantly higher statistics projecting up to 1 million deaths if – a dire probability – the disease is not derailed

Much is familiar about the American health system, its expert research and brilliant hospital facilities and much is also known about its skewed coverage, leaving behind cohorts of poor families and billing everyone else sky high amounts

An exclusive focus on New York would be misguided as the exponential dynamics of the virus hits one large urban area after another, with Chicago in the line of sight in a matter of weeks and California by May

Hard on a European population which took basic liberties for granted, home consignment is nevertheless respected by and large in countries where universal healthcare systems – guaranteeing free (mostly) and affordable healthcare – has ingrained a deep sense of the common good

Not so in the US, where individual choice is the social foundation and liberties are defended “on the barricades” as the defining trait of the American way

The virus, hitting indiscriminately rich and poor, likely to wallow in the large swaths of underserved, underequipped and uninsured American people, throws the principles which indeed made America great, in disarray

Personal safety leads naturally to home consignment but as the death toll worsens, creating havoc in the most exposed communities, liberal foundations of society could be shaken as profoundly by this invisible foe as they were by foreign enemies at Pearl Harbor or on September 11, 2001

With the economy in recession, a strong probability as of mid-April and already anticipated by a slight majority of economists even before the impact of the virus hit home, the extent of the slowdown remains unclear

Reassurances for the benefit of investors, nursing their losses and compelled to lower their capital gain expectations (if any), flow from a simple – and inexhaustible – behavioral argument, “animal spirits” and human impulse to return to form, consume and entertain as if there were no tomorrow

Even though the possibility makes short work of the magnitude of the shock to America’s wellbeing, the families hard hit by unemployment and individual tragedy, the economy will need to regain its footing, bringing some hard questions to the fore about the weaknesses of the US healthcare system

Politically charged, reform of heath care will be once again on the front burner because neither political party can ignore possibly a hundred thousand deaths – or more – by parroting some ideological mish-mash

Reaching deep in America’s foundations built on the freedom to take responsibility of one’s life, social and economic stabilization might call for unusual soul-searching, which is hardly unique in the country’s history, but probably long-winded and less than assured

With life expectancy falling for the last 3 years available (2014-2017), a trend unparalleled in other rich countries, rising rates of mortality amongst middle-aged white Americans – from suicide and drug and alcohol abuse – cast a dark cloud of despair as communal values of trust and civic support lose out to individualistic priorities

The focus on domestic values gains added momentum in the political discourse with the health crisis, but the American public institutions will still be challenged to mend the badly fractured social contract and give new meaning to collective effort…

 

The outcome is not assured as the difficult realignment of priorities in national politics would shake closely-held interests of powerful groups, engaging drawn-out battles and intense debate

America’s inward turn is certain to ripple through the global economy and supersede all international commitments, making US business less welcome in many quarters and traditional US allies less confident in the multilateral commitment of the rule of law…

America’s inward turn is certain to ripple through the global economy and supersede all international commitments

As the alignment with diehard trading partners starts slipping, the loss of focus could also make US business less welcome in many quarters and traditional US allies less confident in the multilateral commitments relying the rule of law…

US may assume that its size guarantees the protection of its fundamental interests but the economic cost in projected growth – difficult to forecast under the new circumstances – is material

Brutally confronted with life’s hazards, households can be expected to increase their precautionary savings and company investments will grind to a halt until the virus is safely tamed

Not born so much by the US relying on its sizable domestic economy, economic distress in turn breeds uncertainty amongst America’s allies and partners, heightening a sense of insecurity in the world order

Albert Camus may observe in the same chapter of his novel,
“Si c’était l’exil, dans la majorité des cas, c’était l’exil chez soi”

"If it was exile, it was exile turned inward, essentially"

 

Competing powers certainly will take note of the geopolitical arrangement

Drawing up the bridge may be an option America – and most of the developed economies – can hardly afford, as we hope to discuss in the third segment of the Economics of Coronavirus, “Walled gardens”