Economic and Social Review: Spring Issue Published

Once again, an excellent selection of very relevant research. Many thanks for posting it here.

However, the silence on this forum about the profound economic impacts on Ireland of Covid-19 is very strange. The contrast with the torrents of posts and comments during the GFC could not be more pronounced. I wonder why.

Some thoughts on the most pressing issue of today:

While the immediate fight to save as many lives as possible, the economic consequences of Covid-19 are likely to very severe.
Nobody needs to be told that Covid-19 is going to have very adverse consequences for both world health and world economics. While the fight to save as many lives as possible continues, we should begin to give some thought to the possible adverse economic consequences, and how they could be mitigated.
Government Borrowing Requirements:
Let us start by posing a realistic figure that EU governments might be required to expend, both in the fight to save lives, and in the subsequent fight to restart much-changed economies. Current EU government debt stands at €13,012 billion at Q3, 2019. Let us assume, for argument, that government borrowing EU-wide will need to increase by 25%, or just over €3,000 billion. Where will that funding come from, in addition to the funding required to roll over existing debt?
Such a level of debt can only realistically be contemplated under an ECB programme to buy those bonds. Otherwise, interest rates are likely to rise significantly. While the €750 billion bond buying programme helped to stabilise the market, it is small in the context of €13,000 existing debt. In addition, under ECB rules it does not, to my knowledge, cover new debt issued by governments. These new debt issues will need to commence very shortly. There is a usually a very limited amount of money that can be found at the back of the sofa.
One possible approach is that the ECB could commit, through bond buying, to bring all government bond rates to zero, or as close to zero as to make no difference, for the duration of the crisis. This is the only way to protect against widening bond spreads and a recurrence of the 2012 Euro crisis debacle. There is also a moral argument for this. What investor has a right of interest, in the current Covid-19 existential crisis. The ‘right’ to get money back is surely a bonus in the current environment.
Bank Liquidity and Solvency:
It requires no great economic foresight to see that bank profitability is going to take a severe hit during this initial health crisis, and particularly during the economic fall-out. The ECB is responsible for setting the capital requirements for all major banks in the EU for the past number of years. If those capital levels prove to be inadequate in some cases, in the Covid-19 fallout, then the buck stops with the ECB. Some industries will fail entirely, and others will not easily recover. The employees in those industries will face an equally difficult time. The consequent losses will rapidly eat into bank capital, possibly terminally so. Therefore, the ECB must either allow the banks to fail, causing mayhem, or support the banks in crisis mode. [Remember ELA, anybody].
There is a more proactive stance that the ECB could take. The ECB could issue deferred equity in all EU banks. The deferred shares would have no voting or dividend rights, and would only be activated when the bank starts to breach solvency requirements. The deferred shares would rank in priority over ordinary shares, and would dilute the value of ordinary share when activated. The net effect would be that ECB stands behind all banks in the Euro area, after ordinary shareholders are wiped out. Such a pro-active stance would immediately banish concerns about the solvency of the entire Euro banking system.
Food Security:
Food security will soon become a concern for next winter. While there may not be a huge fall off in production, all governments will try to increase domestic food stocks as a contingency. This could cause temporary shortages of next winter. This means that food production in Ireland needs to be rebalanced towards the food staples. We can simply not rely on normal market functioning and normal logistics to remain normal until this crisis is well over. In addition, Ireland is well capable of becoming a net exporter to less fortunate countries where food shortages will certainly occur.
Finally:
We are all engaged right now in the most immediate battle front to stop the spread of the virus, and to roll it back. Our public officials, front line workers, and communities have done exceptionally well. Above all, they need our support now. But when their fight is over, let us not present them with other problems that could have been solved with foresight and planning.