The European Union and democracy must deliver by Group of concerned economists published by VOXEU (3/2020).
The world is living an extreme event that threatens the health and the economic wellbeing of the entire population. Large portions of the populations in some regions are mandated to stay at home. The challenge is to maintain the production of essential goods and services and ensure that they reach hospitals, households, and firms in time. Countering the health crisis is at the core of recovery from the economic crisis. In-depth knowledge of input-output linkages and logistics will be a crucial planning tool. Big datasets must be collected and used to monitor the real-time evolution of the economy and to identify bottlenecks in the economic chain. Income support should be given to those who will lose a significant part of their income. Reducing uncertainty about the future solvency of businesses will be crucial to secure the supply of essential goods and services. A large-scale emergency programme requires massive emergency funding. In the face of extraordinary circumstances, the ECB must be allowed to finance such a programme. The EU must act now to prevent the suffering of its people and to save itself and the democratic values it stands for.
1. The COVID-19 pandemic is an extreme event that may come to threaten the survival of the EU and the democratic regimes in its member countries. The pandemic combines tremendous threats to both the health and the economic wellbeing of the entire population. The EU must act now to prevent human suffering from reaching levels unseen in Europe since WWII, and to save the democratic values it stands for.
2. From an economic point of view, the novelty of this crisis is that, due to the risk of contagion, industries whose production requires people to be physically close to each other are subject to severe restrictions. The nature of modern, decentralised economies makes them extremely vulnerable to the shutdown of entire sectors of activity. This means that countering the health crisis is at the core of recovery from the economic crisis.
3. The disruption caused by the COVID-19 pandemic affects demand and supply simultaneously, with negative feedback effects. However, the essential feature of this disruption is its magnitude: entire populations in some regions or countries are mandated to stay at home. If workers do not show up for work, firms do will not produce; if buyers are unable or unwilling to place orders, production in firms in the supply chain will suffer. As a consequence, defaults on nominal obligations will rise and spread like wildfire along the economic and financial chain. Firms will be unable to pay their suppliers and workers, to repay loans, or to meet tax and social security obligations. If firms do not produce, income is not generated. Households will be unable to pay the rent or the mortgage, credit card balances, children’s school fees, taxes, and so on. All this may soon become true for an unusually large fraction of the economy – and “soon” may mean a few weeks…”
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