The first duty of governments is to safeguard their citizens’ survival and physical security. The second is to protect their material wellbeing. The coronavirus epidemic threatens both. Governments have been slow to rise to the challenge.
It is now clear that the virus poses a potentially catastrophic public health risk, which can only be addressed by extraordinary distancing measures that inhibit large parts of economic activity. The task is to implement those measures — most western governments now are, if sometimes trailing the private sector’s initiatives — while minimising the economic harm.
Money must not be a hindrance to health services’ ability to do everything possible to control the epidemic and treat the ill. To worry about public finances in such a moment is both perverse and counterproductive: spending too little is a greater threat to prosperity than spending too much.
Beyond that, the economic damage is multiplied by the repercussions from the initial disruption. Workers who lose their jobs and businesses that run out of cash cut back on their purchases, making more workers and companies lose their livelihoods in turn.
Governments should spare no expense and waste no time to minimise such knock-on effects from temporary hits to cash flows and incomes. Generous loans, guarantees and income support programmes should be put in place. They must also be designed for sectors where self-employment, freelance, gig or project work is common, such as the creative industries.
The drop in inflation expectations shows that the demand contraction is even more drastic than the supply disruption. Strong macroeconomic stimulus is warranted. Central banks have stepped up to the plate. The Bank of England’s textbook policy response combines general stimulus, targeted liquidity support, and an easing of regulatory requirements. The Federal Reserve pumped hundreds of billions of dollars into a stressed market. The European Central Bank fell short of a rate cut, but crafted a strong package of bond purchases and incentives for banks to uphold their business lending.
That package was, however, badly undermined when ECB president Christine Lagarde seemed to dismiss the need to contain the sort of disparity in governments’ borrowing costs that almost brought the euro down in 2011-12. She later clarified but the damage was done: Italian yields soared. The ECB must now state it would welcome a eurozone rescue programme for Italy with few strings attached, so as to activate the emergency bond-buying programme set up in the last crisis — and stand ready to buy Italian bonds unilaterally if markets derail Rome’s spending on coronavirus.
Until the ECB shows it has Italy’s back, that role falls to EU partners. The signs are positive. Ursula von der Leyen, the European Commission president, has put EU budget money on the table and been vocal that Italy and others should spend as much as they need on the health crisis. Even Berlin has expressed similar views. The commission has promised not to let fiscal and competition rules get in the way, and should now ask member states to active a general escape clause outright.
But not all governments have shown the required determination. The US has still to put in place a proper public health response, let alone a sufficient fiscal programme. There is nothing like the global economic co-ordination achieved in 2008-9, though the need for co-ordinated stimulus is just as great. When EU finance ministers meet this week, they should not waste their chance to provide it.
Source: Economy - ft.com
