The battle against Covid-19 is a full-on war. China seems to have won the first battle. Hong Kong, Taiwan, Singapore and Japan have also chalked up visible successes in mitigating the outbreak, almost certainly inferable from their experiences in dealing with the 2003 Sars scourge. Europe and the US, then again, are just barely awakening from their illusions of invulnerability. As a result, the plague is currently raging across the west.
The hardest-hit western country so far is Italy, which has particularly strong monetary ties to China. Northern Italy is the new Wuhan (the Chinese megacity where the coronavirus first rose). With its health system overpowered, the Italian government has slammed on the brakes, shutting down the retail economy and quarantining the whole country. All shops with the exception of pharmacies and supermarkets are closed. Individuals have been instructed to stay at home and may enter public places just for necessary shopping or commuting to work. Many public and private obligation obligations (such as housing rents and interest payments) have been suspended. Italy is attempting to slow down the financial clock until the coronavirus dies out.
Meanwhile, although Germany has had not many coronavirus deaths so far, the number of infections is currently skyrocketing as quickly as anywhere else. In response to the crisis, the German government has introduced a short-time work allowance and granted generous credit assistance, guarantees or tax deferrals for distressed companies. Public events across the country have been cancelledand schoolchildren have been advised to stay at home. And Austria, as far as concerns its, has since a long time ago closed its outskirt with Italy. Austrian schools, universities and most shops have also been closed. Initially, France pursued a progressively relaxed approach, but it has now also shuttered its schools, restaurants and shops, as has Spain. Denmark, Poland and the Czech Republic have closed their borders with Germany.
The US president, Donald Trump, has declared a national state of crisis. Congress has approved a $8.3bn (£6.7bn) crisis program to fund efforts to contain the pandemic. Significantly larger sums are awaiting passage through the Senate. The federal government has also barred remote travelers, first from China and Iran, and now from Europe.
Globally, not all responses to the crisis have been very much targeted, and others have not been strong enough. Most worryingly, some governments have persuaded themselves that they can only slow down the spread of the virus, rather than taking the steps expected to halt it completely. The predictable congestion of hospitals in many heavily affected areas has already exposed the imprudence of such complacency.
On the monetary front, a severe recession can never again be avoided, and some economists are already calling for governments to introduce measures to shore up aggregate demand. But that recommendation is inadequate, given that the global economy is suffering from an unprecedented supply shock. Individuals are not at work because they are sick or quarantined. In such a situation, demand stimulus will simply boost inflation, potentially leading to stagflation (weak or falling GDP development alongside rising prices), as happened during the 1970s oil crisis, when another important production input was in short supply.
Worse, measures targeting the demand side could even be counterproductive, because they would encourage interpersonal contact, thus undermining the push to confine transmission of the virus. What great would it do to give Italians cash for shopping trips, when the administration closes the shops and forces everybody to stay at home?
The same arguments apply to liquidity support. The world is already awash in liquidity, with nominal interest rates close to or beneath zero nearly all over. More interest-rate cuts into a dark red area may help stock markets, but they also could trigger a run on cash.
The brutal decrease in financial activities that epidemiologists say is required make crashing stock markets inevitable, given that central banks’ strategy of excessively cheap cash and pooled liabilities caused an unsustainable bubble. Because they used up their ammunition at inopportune moments, central banks bear responsibility for the bubble that has now burst.
What is really required are fiscal measures to save companies and banks from bankruptcy, so that they can recuperate quickly once the pandemic is finished. Policymakers should consider various forms of tax alleviation and public guarantees to assist firms with obtaining if necessary. But the most promising alternative is a short-time work allowance. This approach, which has been attempted and tested in Germany, compensates for the underemployment of the workforce through the same channels that are already used for unemployment insurance. Even better, it costs hardly anything, because it prevents the losses that would follow from increased real unemployment. All countries should replicate this part of Germany’s strategy to forestall work losses.
But, most important, all governments need to follow China in taking direct action against Covid-19. No one on the frontlines should be constrained by a lack of funds. Hospital intensive-care units must be expanded; temporary hospitals must be built; and respirators, protective gear and masks must be mass-produced and made available to all who need them. Past that, public health authorities must be given the resources and funds they have to disinfect factories and other public spaces. Cleanliness is the request for the day. Large-scale testing of the population is particularly important. The identification of each case can save multiple lives. Surrendering to the pandemic simply is impossible.