IMFS Policy Webinars
Drastic losses in industrial production, much more severe than during the financial crisis, an unprecedented collapse in consumer confidence, declining economic output, whether in Germany, the euro zone or China. Based on current data from the Corona crisis, Prof. Volker Wieland gave an overview of the economic situation in Germany and analyzed economic policy measures at the IMFS Policy Webinar.
On the previous day, the German Council of Economic Experts, of which Wieland has been a member since 2013, had lowered its economic forecast for Germany for this year to -6.5 per cent, while it expects growth of 4.9 per cent for the coming year. For the euro zone, the Council members forecast a decline of 8.5 per cent in the current year. "Only in 2022 we can expect to reach the pre-crisis level again", said Wieland in his virtual lecture. As the development in the euro area and in the United States was worse than initially foreseeable, the economic forecast was lower than the risk scenario which the Council of Economic Experts had assumed in March when hardly any data on the effects of the coronavirus were available.
While the pandemic is now declining in Europe and the focus is shifting to other regions, real-time data point to a gradual recovery, Wieland said. Since the beginning of May, the index for truck mileage has been on the rise again and electricity consumption is also continuing to increase, after having fallen by up to 80 per cent in Italy, for example. In order to support the recovery, the Federal Government has already decided on 353 billion euros in budget-effective measures and 819 billion euros in loans and guarantees - according to Wieland about 33 per cent of the gross domestic product. Germany and Italy are therefore the countries in the euro zone with the largest fiscal support measures. However, this is not decisive for the current upward trend. "The main effect in the second quarter comes from the easing, not from the economic stimulus package", said Wieland. He therefore sees the further course of the recovery as being linked to the degree of restrictions, uncertainty and income losses.
With the emergency purchase program PEPP, the European Central Bank (ECB) has also made its contribution to the crisis. It was only at the beginning of June that the ECB decided to increase its bond purchase program by 600 billion euros to a total of 1.35 trillion euros. It was important to scale back these measures even after the crisis. "The PEPP program was not designed for the long term, so the ECB must be taken at its word", Wieland warned.
At European level, the member states could, for example, draw on the 540 billion euros package agreed in April or apply for a credit line from the ESM stability mechanism. In any case, Wieland expects a high increase in debt. It is crucial to think about the future now. "We have to see how we can grow out of the debt again and avoid a communalization of debt without control over the expenditure".
As the coronavirus shapes all economic activity and also influences monetary policy, the IMFS Policy Webinar on May 19 focused on the pandemic and the adequate policy responses.
At the online event on the date when the conference “The ECB and Its Watchers“ was originally scheduled, ECB Chief Economist Philip Lane explained the current monetary policy of the ECB, pointing out that the announcement of the PEPP program has successfully halted the tightening in financial conditions and contributed to a partial reversal in the trend. In his presentation, he made clear that the ECB was “fully prepared to further adjust our instruments if warranted“. According to Lane, this included increasing the size of the PEPP and adjusting its composition, by as much as necessary and for as long as needed.
Looking at fiscal policy, Vítor Gaspar of the International Monetary Fund illustrated the strong increase in debt due to the corona crisis. According to IMF calculations public debt will amount to 122 per cent of GDP in 17 advanced economies in 2020. In the opinion of Elga Bartsch, “for the first time, fiscal policy is in the driving seat“. In her view, the spontaneous coordination between fiscal and monetary policy is a policy revolution. On the other hand, Bartsch who is Head of Economics and Markets Research at Blackrock, warned against a blurring of boundaries which could lead to a slippery slope. “The coordination does not have clear exit strategies.” She pointed out that this could cause fiscal pressure. Francesco Giavazzi of Bocconi Unversity was also convinced that “we will emerge with lots of public and private ebt” from the coronavirus pandemic. He recommended a combination of a reduction in government spending and a reduction in taxes as policy response. In his view, the winners will be “the countries that allow reallocation to happen”.
Finally, Volker Wieland illustrated the situation in Germany. He agreed that “fiscal policy is the first line of defense”. Measures such as short-time work helped employees to remain in their companies instead of being dismissed right away. However, as economic forecasts are going deeper and deeper, according to Wieland, “the strategies of easing the lockdown is key” to economic recovery.
How the economic perspective can be helpful in the coronavirus pandemic was the topic of an IMFS Policy webinar with Prof. Harald Uhlig.
For Prof. Harald Uhlig from the University of Chicago, the implementation of a national task force of at least 50 experts from various disciplines is essential in order to face the challenges of the corona crisis. In an IMFS Policy webinar on April 17th, he explained what economics can contribute.
Uhlig warned that the current situation could even deteriorate. In view of the economic slump, a possible threat for the banking system, a threatening overload of the health system and finally the imminent destruction of society, the economic perspective could be useful in order to solve difficult allocation and distribution problems. “The competence of economics lies within data analysis and handling dynamic models,” Uhlig said. In the webinar, he gave on overview about recent research papers on the coronavirus crisis.
For example, researchers Jesús Fernandez-Villaverde and Chad Jones estimated the mortality figures in Italy at given times during the lockdown on the basis of a model often used by epidemiologists. Uhlig himself analyzed the change in behavior in an opening after a lockdown. Together with Dirk Krueger from the University of Pennsylvania and Taojun Xie from the National University of Singapore he found that there is a change in behavior of people who are afraid of getting infected. “They prefer pizza to go, enjoying it at home, or watching a soccer game on TV rather than going to the stadium”. According to Uhlig, this shift to "low-infection goods" could help to prevent an economic slump and could lead to sectoral shifts on the labor market: “The waiter of the restaurant will deliver your pizza then”.
Other scholars investigated how much politics should interfere in the corona crisis. In their calculations, economists Fernando Alvarez, David Argente, and Francesco Lippi compared the corona death toll with the extent of the economic downturn. Michael Greenstone and Visham Nigam of the University of Chicago calculated that the value of life in the United States by social distancing is worth 8.000 billion dollars. Andy Glover, Jonathan Heathcote, Dirk Krueger, and Victor Rios-Rull concentrated people's preferences . They examined the question how much lockdown people will tolerate depending on their age and job. On the other hand, Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub, and Ivan Werning looked at the Keynesian supply shock.
Uhlig concluded with an urgent appeal to the federal government to make use of this diverse economic expertise pooling it together with insights from hospitals, companies and further research areas in a task force, which should be split up in respective working groups.
The slides of the webinar (PDF)
In an IMFS Policy webinar, Prof. Veronika Grimm described what a gradual easing of current restrictions in economy and society could look like.
The contact ban is still in effect, many stores are about to open but it is not clear when most of the school kids will return to their classrooms – this applies all the more to kindergarten and nursery. The restrictions in economy and society due to the coronavirus pandemic have paralyzed Germany in large parts. What a strategy for a gradual opening could look like was the topic of an IMFS Policy webinar with Veronika Grimm of Friedrich Alexander University Erlangen-Nürnberg.
First of all, flexibility is a decisive factor. “If the number of people infected gets out of control, you won’t have two or three weeks to react,” said Grimm, who is a Professor of Economic Theory and, since April, a proposed member of the German Council for Economic Experts. Together with an interdisciplinary group of fourteen scholars she has recently published a paper on a flexible and risk-adapted opening strategy.
Grimm argued that in the current lockdown various dimensions are important: the pressure on the economy, social hardships, and medical consequences. Therefore, the question when and how people can return to work can only be answered in a multidisciplinary way. For this reason, Grimm supports the implementation of task forces where researchers of various disciplines collaborate on a national and at the federal state level. These task forces are supposed to observe the impact of relaxations and regularly evaluate the situation and the appropriate reactions. In her view, a recommendation by a task force could be useful for policymakers when they have to defend their decisions. For Grimm, regionally different strategies due to different conditions based on the number of infected people and beds of intensive care available are justified. “However, rules based on certain indicators are important to minimize uncertainty,” Grimm said.
Also from a company’s perspective, clear frameworks and a certain period of preparation are necessary. “The better the preparatory measures, the more restrictions can be eased.” According to Grimm, besides the risk of infection and the question of belonging to a risk group, further decisive criteria are the importance of an area about to be opened in economy and society and the implementation possibilities of protection measures. She argued that the number of those who are infected and can pass on the coronavirus to others but do not show symptoms is also very important.
In Grimm’s opinion, digitizing the health system as fast as possible is an important instrument. In this context, she pointed out that the usual practice of using phone and fax among staff members of health authorities unnecessarily delays information processes. Also, app-based concepts for infection protection would be a significant step if they are accepted by the majority of people. A long, complete lockdown, which would also serve to avoid further waves of infection, is not conceivable at the moment. “Therefore, we will have to learn to live with protection measures for a long time and we will have to learn more about the coronavirus as fast as possible,” Grimm concluded.
In an IMFS Policy webinar, Prof. Volker Wieland presented the economic outlook of the German Council of Economic Experts in the coronavirus pandemic.
In view of the coronavirus pandemic the German economy is heading towards a bigger recession in the second quarter than during the financial crisis in 2009. In an IMFS Policy Webinar on April 8, he presented the scenarios of the German Council of Economic Experts‘ special report. According to the report, a shutdown of five weeks and a recovery of three weeks would be manageable. However, “at the moment it does not look like this is going to happen,” Wieland warned. In comparison to the end of March – the publication date of the special report – the probability for a risk scenario with a pronounced V has increased.
The coronavirus pandemics at the same time hurts supply and demand. On the supply-side of the economy, the supply chains were disrupted and industrial inputs for chemical products or in the engineering industries could not be delivered. On the other hand, the demand for services in tourism, for events or in the catering sector were reduced due to quarantine measures. Therefore, according to Wieland, a conventional stimulus package is not helpful. “It is not a matter of stimulating demand but of maintaining capacities by offering credits or liquidity.” In his view, a capital levy would also be the wrong measure, hurting mostly medium-sized companies. “This would counteract all rescue packages,” Wieland warned. Instead, he called for discussing an exit strategy ugently. “We have to establish rules for our health as a basis for ramping up production again.” He argued that a task force made up of experts of various disciplines could help in this process.
Wieland rejected so-called corona bonds, mutualized debt without any influence on the spending. This could lead to hard disputes between the member states, Wieland warned. He rather recommended the European Stability Mechanism (ESM). Regarding the stigma states such as Italy were afraid of, he recommended several states to make use of a credit line with the ESM simultaneously. In Wieland’s opinion, the interventions of the Euorpean Central Bank (ECB) that announced the Pandemic Emergency Purchase Programme (PEPP) on March 18 are only a temporary support. The ECB has delivered in advance and can only reduce the spreads of various countries during a certain time, Wieland argued.
Presentation (in German) "Die gesamtwirtschaftliche Lage angesichts der Corona-Pandemie" (PDF)