I have to admit, I am a huge fan of Tom Clancy, RIP. Jack Ryan is the perfect patriotic hero, the earlier version of Designated Survivor’s Tom Kirkman. Always honest, always peaceful, yet never afraid to use everything necessary to defend the country, always law-abiding and always finding the best solution.
(Spoiler alert! If you’re planning to read Clancy’s Debt of Honor, just scroll down two more paragraphs.)
In the aforementioned book, the US is facing an attack from Japan both on military and economic fronts. Though the solution for the military conflict is thrilling, I was even more fascinated by the simplicity and brilliance of how Ryan solved the economic issue, the collapse of the stock market engineered by the Japanese zaibatsu. The Japanese trick was simple: a “logic bomb” inserted into the computer program running the exchange blocked the storage of all trade records made after 12:00 on a certain Friday. Thus, no one knew, who owned what and how much was actually paid. Chaos and collapse, as predictable.
The solution proposed by Ryan, in fact inspired by his wife, Catherine, was even simpler: to pretend that the transactions that were deleted on the day of the attack never existed at all and that all trade information was to be restored to its condition at noon of that day.
Now, of course I’m not suggesting that the economic downturn caused by the Covid-19 pandemic should be solved with a similar step (though after all, why not?), but that sometimes a little unorthodoxy, something unheard of before might be the best or the simplest solution. To put it otherwise, desperate times call for desperate measures.
Euronews ran a good article on what the EU could learn from the UK of the 1930s. I’m not going to replicate it here, but it is worth to remember that leaving the gold standard was something unimaginable up until 1931, even if sticking to it meant severe austerity measures, huge levels of unemployment and so on. And leaving it behind proved to be much simpler than expected, and actually rather beneficial for the UK.
Countries on their own level have already taken dramatic steps to contain the damages caused by the lockdowns: money is poured into the economies on a level never seen before, unconditional cash payments are being sent to citizens (don’t call them universal basic income if you don’t like the term, but they are what they are) and private employees are paid by governments. We’ve also seen the expansion of social welfare schemes, the suspension of debts and similar measures. The German rescue package itself is an almost unbelievable one: it includes measures that go against decades of (over)disciplined fiscal policies, and there are estimates that put its value at about 60 percent of the country’s GDP.
The EU also took the unprecedented step of giving more freedom to the member states, relaxing most of its fiscal and macro-prudential regulations. Some of these were unimaginable even in 2009, as Greece has painfully experienced it. The packages (recovery fund, joint fiscal stimulus, the ECB’s PEPP) adopted by now or waiting for approval amount to a staggering €3,8 trillion and counting. In a very promising step, some help originally intended for Eurozone members alone was also made available to MSs outside the club. The Commission has also proposed to release the unused cohesion funds (app. € 8 billion) that should normally be returned to Brussels.
These are all signs that the leaders of Europe have realized that the Covid-19 pandemic is something we’ve never faced before. But the solutions proposed on EU level so far are not really out-of-the-box, even if they’re testing the limits. In fact, most of them are out of the playbooks from and after 2009, even if there are many signs that exactly those tools caused rifts within the EU and played a decisive role in the Eurosceptic wave hitting the continent. We’re yet to see a plan similar to the post-WWII Marshall-plan, despite the fact that it was promised by high ranking EU officials.
I personally liked the idea of coronabonds for their novelty and for the solidarity they could’ve expressed, even though they might have some negative consequences, as well. But the idea was rejected, mostly because of the resistance of the “Frugal Four” led by the Netherlands, insisting on “traditional” budgeting and financing principles. (As Dutch FinMin Wopke Hoekstra put it, “Eurobonds is a thing I wasn’t OK with, I am not OK with and I will never be OK with”. We’ll see how long “never” actually lasts.)
Universal basic income was something Finland experimented with but was rejected by most of the states, claiming that it discourages people from actively seeking a livelihood. There are of course many questions to be answered before something similar can be introduced on a permanent basis (the relationship between work and money, to what extent is someone responsible for not having adequate minimum income, etc.), but the coming months will show, how effective it can be as a temporary measure.
Kenneth Rogoff, renowned crisis/downturn expert also demanded new approaches and tools, like introducing global debt moratoriums for emerging-market economies (think India or Africa), or lowering interest rates below zero.
The tools that proved effective in the past might help. Just like after 2009, they might be able to restore the world. But since our economies have changed dramatically in the last decade and the pandemic might shape them in ways we cannot imagine now, especially if it lasts for an extended period of time, it is yet to be seen how fundamentally different our economies will look like after it is over. (And before another incurable virus hits us, something that seemed unlikely up until a few months ago.)
Instead of trying to save the old economy (the economy of today), and after that returning to the old fiscal/budgetary considerations, the time would be perfect to build a new, greener, more sustainable economy. One not so dependent on ever growing consumption, one that might be probably more in line with the Schumacherian (not the world famous German F1 driver, but the German-born British economist) principle of “small is beautiful”. You don’t have to agree with him on everything, but he was one of the firsts back in the ‘70s claiming that the current economic model is unsustainable, or that nature’s resistance to pollution is limited. He also championed the appropriate use of technology. This thought is also absolutely relevant today, when technology and digitalisation plays an ever more central role in our economies.
There have been baby steps within the EU, trying to bring the new MFF in line with the commitment to convert the European economy to a carbon-free, sustainable one. But the overall result was not really promising so far. The timing of the pandemic couldn’t actually be any better to achieve this breakthrough, from a revolutionary point of view, at least. In desperate times like these, desperate measures are more easily “digested”, in most cases even welcome. If you’ve lost your job anyway, you might be more willing to accept a totally new one.
The Great Depression gave us Keynesian economics replacing classical economic thinking. The Great Covid-19 Pandemic might give us something else, something new. The rethinking of our world should start now and this could mean adopting policies until now considered fringe/unorthodox to the mainstream doctrine.