100 billion?

Carlos Arenillas

20 de Marzo de 2020, 09:59

As we humans are battling against Covid-19 on multiple fronts, (health, economic, political and psychological), we are learning things. One of them is clear: the price we will pay for beating this virus will be high, in lives, in anguish and in economic terms. It is a cost that we still do not know.  However, the price of stopping the pandemic includes lowering our economic activity and lowering it a lot. On the bright side, this will at least improve the planet’s health, vis-a-vis pollution.  

The massive quarantine that we are facing, which is already almost global, will have very negative effects on the economy. Companies will not be able to produce goods and services, workers will not be able to work or to consume. Yet we will have to increase health spending –remember all those cuts to the public health system?

In my opinion, a recession is guaranteed, and not only in our country.  However that recession is optimal, not because it is desirable but rather because it is the best we can do now to beat the virus.  

Let’s do a simple but illustrative exercise to estimate the economic cost.  Spain’s GDP last year was roughly 1.2 trillion euros. On average, a quarter of the GDP is 300,000 million euros. Now we are going to assume that for three months all activity will be semi-paralyzed to stop the pandemic. Suppose that this stoppage implies a 33% drop in the economy, one third of the GDP. That is 100,000 million euros that would be 'lost' –that being a conservative estimate.

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That huge amount would be the value of the products and services that would neither be produced nor consumed during that period –the income of workers and companies that would not exist. If, after those three months, the economic activity were completely normalized, something that is difficult but not impossible, a part of what was lost would be recovered, but not all of it. If the problem were to continue, albeit less dramatically than now, it would be even worse.  

Those enormous losses must be assumed, displaced into the future or monetized. There are no other options. When I say losses, I do not mean company profits; in my opinion they are lost. I mean less income from workers and companies. Only the wealthiest minority of workers and companies, those with accumulated savings, will be able to face those losses. Most of them will not have assets, financial or real estate, to obtain liquidity and face their vital expenses, (food, energy, rent etc.) or others, (salaries, suppliers, mortgages, etc.). More than 40% of Spanish workers are temporary or work part-time and 40% of the former only have contracts that barely last for a month. They are the weakest sector in this situation; they are the ones who are being thrown out into the street unemployed.  You must make it temporary unemployment

Only the State, all of us, can confront such a huge hole in our economy. How can this be done? It can be done by using fiscal measures first and monetary measures second; or, a combination of both, because nowadays the line between the two policies is very blurred.

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The fiscal measures that have been taken so far, in almost every country, run along the lines of offering deferment of payments or exemptions from taxes. However few taxes will have to be declared and settled if there is no activity. Moreover, they will not be enough to cover the whole that has been generated.  

Traditional monetary measures, such as lowering interest rates, have been taken in the Anglo Saxon countries where there was still some room to do so. However, in the euro zone, it is almost impossible to do so because the rates are already negative and lowering them further could be detrimental to the financial system. Increasing the quantitative easing, (QE), is also being carried out however it is unclear that its effects are those that are desired to tackle a supple and demand shock like the one we have. Furthermore, the vision of injecting money into financial markets without reaching the citizens and companies that need it most could have serious political costs. 

In the current serious circumstances, offering credit to companies, especially small and medium sized companies, in lax conditions is fine.  Especially as Germany has done through its public bank. There, the government will make 500,000 million euros available to companies in difficulties through the guaranteed framework established by the German Public Development Bank, (KfW). Initially, $20 billion will be released. The problem may be the speed at which this measurement runs. If the economy stops for three months, much of the lost income will not be recoverable and therefore, either the credits cannot be returned or they will have to be refinanced indefinitely.  

There is another more innovative option available that I mentioned in my previous article in El País/Agenda Pública: helicopter money and sovereign digital money. Specifically, the creation of a digital version of State money, (like banknotes, but digital), that is delivered to citizens without generating debt. There are many ways to launch monetary helicopters. Let’s look at one of them. 

For example, let’s suppose that the central bank, (in our case, the European Central Bank, ECB), transfers to governments, who in turn transfer it all, the equivalent of 3,000 euros, (the approximate equivalent of three months’ minimum wage) to citizens of legal age. In the case of Spain, we would be talking about 36 million people with the right to vote, the amount of money to be delivered would be about 108,000 million euros, practically the entirety of the hole we had previously calculated

To do this, it would only be necessary to use the electoral roll and assign each citizen with a single current account in a bank. The banks would receive a transfer from the State and would pay 3,000 euros to each account. The total amount transferred to the accounts of the citizens would be a liability for the bank, its counterpart in assents would be bank reserves deposited with the central bank.  

In the case of the central bank’s balance sheet, they would have new liabilities with the banking system to the amount of 108,000 million euros.  What about the assets? For example, a 100-year bond issued by the State.  Austria issued a 100-year bond in 2019 which now offers a yield of less than 0.5%.

A measure such as helicopter money has advantages over fiscal and monetary measures. It is fast and administratively easy to execute, and its effect quickly reaches where it is most needed to avoid a collapse of the economy. As a reflection, I wonder what the difference is between a 100-euro note, which does not pay interest and a 100-year government bond at 0%.  

Given the important battle that we have to wage against COVID-19 it is not enough to support our health systems and to quarantine the population. We have to cover the economic consequences of the decline in economic activity that is essential to end the virus. We must be brave, determined and imaginative. It is not a matter of 'stimulating' the economy when we are quarantined, but of preventing its collapse. May luck and strength be with us!

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