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OPINION AND ANALYSIS | 04-04-2020 08:17

Hitting the reset button to avoid a new Great Depression

So far so good, it seemed. Yet the emergence of partisan bickering this weekhas tainted what appeared to be one of the most successful state and political reactions to the coronavirus crisis, amplified by the botched responses of countries like Spain and Italy, and leaders like Donald Trump and Jair Bolsonaro.

An overwhelming majority of the Argentine population approves of President Alberto Fernández’s handling of the global Covid-19 pandemic, a sentiment that is echoed by regional and international experts.

While the Fernández administration initially downplayed the risks posed by the novel coronavirus – with Health Minister Ginés González García calling dengue the most dangerous public health threat in February – it quickly backtracked and swiftly imposed tough measures including a nationwide quarantine and a lockdown of the international borders which are expected to add substantially to efforts to “flatten the curve” of both cases and deaths. As President Fernández personally took the lead in the war against the virus, he quickly pushed out a series of policies aimed at reducing the economic impact of a domestic and global sudden stop of economic activity, with a stronger focus on lower income sectors and retirees.

So far so good, it seemed. Yet the emergence of partisan bickering this week has tainted what appeared to be one of the most successful state and political reactions to the coronavirus crisis, amplified by the botched responses of countries like Spain and Italy, and leaders like Donald Trump and Jair Bolsonaro.

Unfortunately, even if he gets it exactly right — and he’s far from there yet, particularly when it comes to the insufficient economic policy reaction that so far hasn’t steered Argentina away from its own Great Depression, and the fact that our flu season is just around the corner — unless a coordinated global response hits the reset button on the global socio-political-economic framework, all of us will end up in the gutter.

As things stand, it is clear that the draconian limitations on public circulation imposed in the Chinese city of Wuhan, emulated in several major cities across Southeast Asia, have proven successful at slowing down the virus, while delayed responses – such as those exhibited by governments across the European Union and the United States – have led to exponential growth and a complete collapse of domestic health systems and ensuing loss of life. Covid-19 is not like the flu and this is not 1917 – the virus’ capacity to cross international borders was limitless given global integration, while the sheer size of our older populations indicate the total death toll will be relatively high. This, in turn, foreshadows a tremendous blow to the global economy on the back of deep demand and supply shocks which have outsized impacts on poor and so-called emerging market economies, among them Argentina.

Paradoxically, the imminent destruction to economic and social value that is set to hit the whole world over the next several months, in a manner perhaps worse than the Great Depression, can be potentially fully mitigated through cooperation and bold action. It requires visionary leadership, particularly from the globe’s major powers, and international solidarity unlike the world has ever seen. As the Financial Times’ Martin Wolff noted in a recent column, the novel coronavirus outbreak is the first such pandemic since the Spanish flu – only this time we are at peace and the world is enjoying unprecedented wealth. All of this is contingent on the continued effectiveness of social distancing and an eventual discovery of some sort of vaccine that renders Covid-19 a controllable infectious disease, meaning in the relative short-term people will be able to go back to work.

Across the globe, experts appear to finally be coming to the realisation that there is no dichotomy between saving lives and protecting the economy. As International Monetary Fund boss Kristalina Georgieva and the World Health Organisation’s Dr. Tedros Adhanom Ghebreyesus wrote in a recent op-ed for The Telegraph, public health and the economy go hand-in-hand – particularly for the most vulnerable, who will feel the effects of the dual shock: the coronavirus pandemic and the economic downturn. Thus, the IMF has increased its emergency funding capacity and it is advocating for an easing and even complete standstill of debt servicing for emerging and poor economies, while prioritising health expenditures. It is currently lending to a record 85 nations, it says.

The risks to the global economy cannot be understated. According to the controversial economist Nouriel Roubini, we are in for a “Greater Depression,” with a voracious economic and financial correction that will be faster and deeper than the 2008 crisis and even the Great Depression.

“In those two previous episodes, stock markets collapsed by 50 percent or more, credit markets froze up, massive bankruptcies followed, unemployment rates soared above 10 percent, and GDP contracted at an annualised rate of 10 percent or more. But all of this took around three years to play out. In the current crisis, similarly dire macroeconomic and financial outcomes have materialised in three weeks,” Roubini wrote in a recent piece for Project Syndicate. The policy response to the so-called Global Financial Crisis (GFC) set the conditions for market distortions that pushed asset prices incredibly high, meaning several sectors of the global economy were highly leveraged, while at the same time limiting central banks’ capacity to respond with even lower interest rates. Several major economies, including Spain and Italy, remain excessively indebted, while emerging market economies have lost the influx of hard currency generated by Chinese and Asian demand for commodities. The United States has lost its way as the global superpower on the back of failed military excursions and a capitalist system that breeds inequality, while China and Russia seek to dispute that power but fail to generate the trust of the international community given their greedy and autocratic leaderships. Iran and North Korea are hotspots of potential bellicose activity, both against and from the US.

In that context, the international response to the Covid-19 pandemic has set in motion a vicious cycle of dual supply and demand shocks for which the global economy is not prepared. Quarantines and stay-at-home orders have disrupted global supply chains by halting production of goods and the offering of services. “The challenge posed by a supply-side-driven downturn is that it can result in sharp declines in production and widespread bottlenecks. In that case, generalised shortages – something that some countries have not seen since the gas lines of 1970s – could ultimately push inflation up, not down,” explained economist Kenneth Roggoff.

If we are to avert a global economic meltdown that matches or exceeds the Great Depression, it is time for a new level of cooperation that seems unlikely in a context of rising nationalism, xenophobia, and the intense polarisation of electorates. It is imperative that people across the globe continue to have access to essential goods and services while they are respecting quarantine, meaning that either they must retain their jobs or be compensated by the government. This is a particularly pressing concern for countries like Argentina and India, where a large portion of the population works in the informal sector or black economy. At the same time, governments must work to avert mass corporate defaults and bankruptcies, destroying the cumulative value and knowledge generated by companies as the productive nodes of the economy.

Whatever facilities or bailouts the private sector will receive must include explicit conditions that include retaining jobs and collaboration in overcoming the current crisis, Nobel laureate Edmund Phelps and economist Roman Frydman argued in a recent column where they used the concept of “systemic insurance.” Governments must guarantee the production of medical equipment, of essential goods and service, that people can access said goods and services, and that they can cover their financial obligations.

Thus, government spending must be increased dramatically and consistently until a recovery is emerging. And it must be done with clarity, speed, and uniformity, as another FT columnist, Gillian Tett, recently argued. This has not been the case in Argentina, for example, where the government’s piecemeal approach to averting the implosion of the private sector hasn’t generated the funding conditions to avoid a total collapse of payments. Argentina’s fiscal stimulus plan is estimated by the IMF at less than two percent, which seems to make sense in the context of a bankrupt state in the middle of debt negotiations with private creditors. Yet, even if deeper deficits derail Economy Minister Martín Guzmán’s restructuring plans, they are necessary in order to maintain jobs, which is the only way to limit the negative impact on any future recovery. Mass bankruptcies will result in a loss of jobs in an already destroyed economic situation for individuals and businesses, meaning it will exacerbate the aforementioned vicious cycle. At this juncture it isn’t really clear where the funds to pay for a massive stimulus package will come from, but they need to be injected, even if it means printing even more money.

Small, medium, and large companies have already begun to default on their providers while struggling to pay their employees. The Central Bank needs to guarantee low-interest credit lines for the private sector to pay wages, while the government must ensure those in the informal sector are covered throughout the health emergency. And all of this must be reverted the day the economy begins rolling. It is time for Alberto Fernández and the rest of the global leadership to stand up and deliver forceful action that will avert the coming economic collapse. The window of opportunity is shrinking quickly.

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Agustino Fontevecchia

Agustino Fontevecchia

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