Juan Corona
Professor of Applied Economics and Director of the Jean Monnet Chair on Fiscal Integration in the EU at Universitat Abat Oliba CEU
As the official end of the pandemic draws near, we are beginning to detect a growing interest in its economic consequences at a global level. This concern is welcome after many months presided over by a spurious debate between life and economy. The economic crisis in which we are immersed (caused to a large extent by the lamentable management of the pandemic by most governments) has different characteristics from the classic crises caused by the depression of aggregate supply or demand. The paralysis of the economy has not been due to the well-known macroeconomic issues, but to a political decision that has affected a large majority of productive sectors.
In quantitative terms, the global economic contraction exceeds even that of the 2008 crisis. The IMF has even put the fall in world GDP at 3 points for each month of confinement. It is therefore essential to speed up vaccination campaigns in order to return to normality as soon as possible. In the current scenario, weeks count.
Looking ahead, it is obvious that economic policies must be specifically designed to counteract the negative effects of the pandemic. A priori, there are favorable elements with respect to previous crises. Fundamentally, the fact that productive capacity has not disappeared, but has been immobilized. This will allow significant growth rates in the short term, but we must not forget the disappearance of productive units in various sectors, which requires priority consideration.
On the other hand, this problem can be offset if appropriate measures are taken to promote sectors such as new technologies, online sales, etc. Consumer habits will change in the short term, although in the medium term it would be risky to make any pronouncements on the consistency of these changes.
In any case, the duty of politicians is to implement economic policy measures that effectively compensate for the weaknesses of the new production and consumption model. To this end, the tendency of various governments to implement so-called Keynesian policies is a cause for concern. There are two reasons for this: firstly, because of the usual partial and erroneous interpretation of Keynesianism and, secondly, because of its inadequate adaptation to the current crisis.
With respect to the first point, we must remember that we are not facing a demand crisis, and that public spending has not ceased to increase in recent decades.
Decades. Undoubtedly, the ordinary revenues of the states will be unable to keep up with the spending race, forcing excessive increases in public indebtedness? Secondly, Keynesian growth-oriented prescriptions require that the increase in spending be accompanied by a reduction in taxes so as not to eliminate the multiplier effects. This approach is difficult for politicians to understand.
The combination of expansionary fiscal policy and significant monetary stimulus by central banks may offer positive results in the short and medium term, but in the long term very serious inflationary pressures will inevitably arise, requiring interest rate hikes and liquidity cuts. These measures will coincide with very high levels of public debt, which will be difficult to reverse, so the future of the world economy does not invite optimism.
Humanity has successfully fought against covid. Will it be able to do the same against the economic crisis in a short-sighted framework in a scenario in which public debt is already doubling world GDP?
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