The full university professor of Economic Analysis at the Faculty of Economics of the Universitat de València, Matilde Mas, analyses in an article published in 'The Conversation' the concern for the current and future economic situation facing the world crisis arising from Covid-19.
The current coronavirus pandemic is affecting practically the entire world population, with the loss of human lives as the most dramatic phenomenon. However, as the full professor of Economic Analysis Matilde Mas highlights, the current and above all the future economic situation is very alarming.
In her article in the media network 'The Conversation', Mas analyses the origin of the pandemic and the measures for people confinement taken in order to slow down its spread first in Wuhan city and then in Hubei province.
The confinement affected many occidental companies after the stop of imports of intermediate and final goods due to the closure of production of Chinese companies, especially manufacturing companies. 'The drop in production, together with fear, and restrictions on mobility in order to slow down contagion, caused a sharp fall in global demand. China currently plays a very important role in the production, trade, tourism, raw materials market and luxury goods industries. Today, it represents a third of the world's aggregate demand, and its GDP, 16% of the world's GDP,' emphasises Matilde Mas.
As the article continues to analyse, the situation was aggravated by the sharpened fall in the stock market, with rises in risk aversion resulting from the panic, due to uncertainty, thus affecting the financial markets and making them more vulnerable.
However, according to Mas, the worst scenario came with the announcement of the first infected people in Italy, one of the economic engines of the European Union. The jump to the rest of the countries was quick: first Spain, then France, Germany, the United Kingdom and the United States, and at the moment all countries are threatened.
On the other hand, for the first time there seemed to be an agreement on three fronts: it is a transitory phenomenon, but of unknown duration; the closure of economic activity imposes economic costs that are difficult to calculate, but which are expected to be immense; and the need to strengthen the health system while avoiding the closure of solvent companies and the consequent dismissal of workers.
Two ideas summarise this last objective: providing all the liquidity needed by companies and a safety cushion for workers, including tax reductions and offering moratoriums on payment of taxes.
All these measures, as the full university professor of Economic Analysis says, cost a lot of money and, moreover, the money is needed at the moment. 'It is not possible to postpone health spending, nor to leave workers and companies in the lurch because of a unexpected event', Mas points out.
There is a fairly general agreement that, in order for these measures to be effective, they must be very generous, because only in this way they will be able to build trust from agents and slow down panic. And if this mechanism works, it is very likely that much less money will be needed in the end, not only the promised money but also the money they would be forced to spend with less ambitious measures, states the article.
To illustrate the latter, Mas gives the example of the United States and its quick and generous response to the 2007 crisis, as well as its very fast recovery thereafter. However, this requires a credible response and an avoidance of the markets' mistrust in face of the possibility of not repaying debts.
Eurobonds issue
This is where the Community organisms come in. Nevertheless, as Mas points out, 'the Commission's response could not have been more disappointing: every man for himself, I will ease the restrictions on state aids and turn a blind eye on the deficit and debt restriction'. The ECB, despite its initial hesitations, has supported the liquidity of the system with EUR 750 billion.
However, the article affirms that these measures are not enough. It is urgent to take fiscal measures and the one that has the most prospect of success is the issue of Eurobonds, which are nothing more than debt (like Spain's public debt), but for which all euro area countries would be responsible (and not just Spanish citizens).
Matilde Mas concludes her article with a devastating omen: 'we have never been so close to issue, for the first time, debt on behalf of all the euro area countries. It is not the so-needed fiscal union, but it is an important step in that direction. If this is not done now, I really doubt that the European Union will survive the pandemic.
