• Editors from VoxEU talk about the new eBook on the economics of the coronavirus written by leading academics and policymakers. And the prognosis not good.
• One key difference in this pandemic is that COVID-19 is hitting the largest economies whereas earlier pandemics hit either one big or a few small economies. The 10 hardest hit countries from coronavirus are almost identical to 10 largest countries in the world leaving vastly larger economic consequences.
• Manufacturing is facing a triple hit. First channel is the supply affect from factory closures, (unlike services you can’t run factories remotely). This is amplified by the integrated nature of global value chains which creates contagion in the supply chain. Asia’s dominance in producing intermediate goods makes this worse. Finally, the demand shock also hit manufacturing as consumer goods purchases are postponed.
• Containment measures act as a huge multiplier of economic loss. But with no vaccine or cure quarantines and travel bans are the best way to limit the spread of COVID-19 and to slow virus transmission. Health systems will otherwise be overwhelmed.
• Overall shock from coronavirus may not be temporary. De-globalisation through re-shoring, regulators may incorporate pandemic stress tests in the financial sector, potential changes to labour mobility and migration.
• Government policy should be to keep the lights on and cash flowing. Fiscal policy is clearly the weapon of choice. Must be coordinated to be most effective.
• Monetary easing should also be coordinated to avoid beggar-thy-neighbour policies.
• But Europe might act differently in crisis and could yet come together. Examples of possible join response include any decision to expand common instruments such as the solidarity (disaster) fund.
Why does this matter? This pessimistic take suggests deep economic losses and further weakness across financial markets. The comparison on the top 10 largest economies with the 10 countries hit hardest by the virus is sobering. As is the mention of the huge economic cost should Schengen’s open borders be closed. De-globalisation implies efficiency losses on the production side while at the same time failing to shield supply chains from future disruption given the virus is global.
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