Luiss Open: The economic fallout of the pandemic
Francesco Saraceno, a member of the Scientific Council at the Luiss School of European Political Economy, discusses economic policy decisions during the pandemic.
In the Financial Times, Mario Draghi made an interesting contribution to the debate on policies to combat the coronavirus pandemic. What can we make of the analysis by the former ECB president in hindsight? Let’s go through it point by point.
- First of all, and Draghi isn't the first to say this, it's clear that this isn't a “classic” Keynesian crisis. Both aggregate demand and aggregate supply are melting like snow in the sun. Aggregate demand is suffering from plummeting incomes and pervasive uncertainty, while aggregate supply is being hit by disrupted international value chains and a collapse in orders.
- Furthermore, and this is almost the sole reason for cautious optimism, the origin of the crisis is clearly exogenous, meaning it lies outside our economies. This means that, if managed properly, we could recover fairly quickly once the pandemic is behind us. We can therefore hope for a V-shaped trajectory, with the sharp downturn followed by an equally rapid recovery. The challenge is to avoid a “U,” or even worse, an “L.”
- The challenge for governments and central banks, therefore, is to prevent the temporary difficulties of fundamentally sound businesses from causing them to fail. When the economy starts up again, the production system will need to be as minimally damaged as possible, so that it can support the recovery in consumption and aggregate demand. In short, it's about keeping businesses afloat—especially small and medium-sized ones—that are currently unable to meet their financial obligations. Whatever it takes, as previously stated.