Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes Edited by Richard Baldwin and Beatrice Weder di Mauro Centre for Economic Policy Research 33 Great Sutton Street A VoxEU.org Book London EC1V 0DX CEPR Press Tel: +44 (0)20 7183 8801 Email: [email protected] www.cepr.org CEPR Press Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes CEPR Press Centre for Economic Policy Research 33 Great Sutton Street London, EC1V 0DX UK Tel: +44 (0)20 7183 8801 Email: [email protected] Web: www.cepr.org ISBN: 978-1-912179-29-9 Copyright © CEPR Press, 2020. Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes Edited by Richard Baldwin and Beatrice Weder di Mauro A CEPR Press VoxEU.org eBook CEPR Press The views expressed in this book are those of the authors and not those of CEPR or any of the institutions with which the authors are affiliated. The editors would like to acknowledge the important and timely contribution of research assistance from Guilia Sabbatini and Anmol Kaur Grewal, together with Anil Shamdasani, Sophie Roughton and Alex Southworth’s hard work on production to enable this eBook to be produced so quickly. Centre for Economic Policy Research (CEPR) The Centre for Economic Policy Research (CEPR) is a network of over 1,500 research economists based mostly in European universities. The Centre’s goal is twofold: to promote world-class research, and to get the policy-relevant results into the hands of key decision-makers. CEPR’s guiding principle is ‘Research excellence with policy relevance’. A registered charity since it was founded in 1983, CEPR is independent of all public and private interest groups. It takes no institutional stand on economic policy matters and its core funding comes from its Institutional Members and sales of publications. Because it draws on such a large network of researchers, its output reflects a broad spectrum of individual viewpoints as well as perspectives drawn from civil society. CEPR research may include views on policy, but the Trustees of the Centre do not give prior review to its publications. The opinions expressed in this report are those of the authors and not those of CEPR. Chair of the Board Sir Charlie Bean Founder and Honorary President Richard Portes President Beatrice Weder di Mauro Vice Presidents Maristella Botticini Ugo Panizza Philippe Martin Hélène Rey Chief Executive Officer Tessa Ogden Contents Introduction 1 Richard Baldwin and Beatrice Weder di Mauro 1 So far, so good: And now don’t be afraid of moral hazard 25 Charles Wyplosz 2 Flattening the pandemic and recession curves 31 Pierre-Olivier Gourinchas 3 Limiting the economic fallout of the coronavirus with large targeted policies 41 Gita Gopinath 4 Italy, the ECB, and the need to avoid another euro crisis 49 Olivier Blanchard 5 The EU must support the member at the centre of the COVID-19 crisis 51 Alberto Alesina and Francesco Giavazzi 6 Helicopter money: The time is now 57 Jordi Galí 7 What the stock market tells us about the consequences of COVID-19 63 Stefano Ramelli and Alexander Wagner 8 Ten keys to beating back COVID-19 and the associated economic pandemic 71 Shang-Jin Wei 9 Saving China from the coronavirus and economic meltdown: Experiences and lessons 77 Yi Huang, Chen Lin, Pengfei Wang and Zhiwei Xu 10 China’s changing economic priorities and the impact of COVID-19 93 Jonathan Anderson 11 Singapore’s policy response to COVID-19 103 Danny Quah 12 The experience of South Korea with COVID-19 113 Inkyo Cheong 13 COVID-19: Europe needs a catastrophe relief plan 121 Agnès Bénassy-Quéré, Ramon Marimon, Jean Pisani-Ferry, Lucrezia Reichlin, Dirk Schoenmaker and Beatrice Weder di Mauro 14 The COVID-19 bazooka for jobs in Europe 129 Luis Garicano 15 The monetary policy package: An analytical framework 139 Philip R. Lane 16 Bold policies needed to counter the coronavirus recession 145 Christian Odendahl and John Springford 17 Europe’s ground zero 151 Ugo Panizza 18 Economic implications of the COVID-19 crisis for Germany and economic policy measures 167 Clemens Fuest, Michael Hüther, Jens Südekum and Beatrice Weder di Mauro 19 Finance in the times of COVID-19: What next? 179 Thorsten Beck 20 How COVID-19 could be like the Global Financial Crisis (or worse) 185 Nora Lustig and Jorge Mariscal 21 Protecting people now, helping the economy rebound later 191 Jason Furman 22 Policy in the time of coronavirus 197 Pinelopi Goldberg 23 Containing the economic nationalist virus through global coordination 203 Adam S. Posen 24 The case for permanent stimulus 213 Paul Krugman vi Introduction Richard Baldwin and Beatrice Weder di Mauro Graduate Institute, Geneva and CEPR The world has been an unusual place since we published our first VoxEU/CEPR eBook on COVID-19, Economics in the Time of COVID-19, on 9 March 2020. The number of COVID-19 cases and deaths have soared globally. Europe is now the centre of the pandemic but the US, given its huge population (330 million) and lack of national leadership, is on course to become the next centre. Stock markets gyrate 5 to 10% a day, sometimes up but mostly down. Other financial markets are equally volatile. Governments in Europe have imposed public health containment measures that would seem extreme in any other circumstances. Containment policies in the US are spreading without coordination or coherence as cities and states fill the leadership void. But not everything is becoming more uncertain. The COVID-19 crisis has become more predictable in a sense. What was widely viewed as a ‘Chinese problem,’ and then an ‘Italian problem’ has become an ‘everybody problem’. With few exceptions, governments initially downplay the disease until sustained community transmission takes hold. Then they impose severe social distancing policies, work and school closures and the like. This inevitably leads to almost immediate economic hardship, which then leads governments to propose increasingly bold anti-recession measures. This was the pattern in Europe and looks set to be the pattern in the US and many other nations. All this is due to the highly contagious nature of the virus, and the inexorable implications of its explosive spread during the ‘acceleration phase’ of the epidemic. This eBook is an attempt to collect the thinking of leading economists on what is to be done. In addition to contributing to analysis of the rapidly evolving policy reactions, we hope this eBook will help nations get ahead of the curve – to think ahead on the medical and economic policies that will be needed. The collected wisdom of our authors also points to another critical aspect of this crisis. Without care, solutions to one set of economic problems could – for some nations – turn this economic crisis into a financial crisis, or a debt crisis, or a foreign exchange crisis, etc. Care must be taken to ensure that temporary solutions don’t create long-lasting problems. 1 Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes The size of the economic damage is still very uncertain, but it is certain that it will large. Governments now need to focus on mitigating that damage. This is the time to bring out the big artillery; this is not a time to be timid, but to do whatever it takes, fast. What’s the problem? Medical and economic shocks COVID-19 is a particular disease. It is highly infectious but not particularly deadly – especially for the healthy and the young. It is also unusual in that it has hit all the major economies of the world at the same time. Countries accounting for over two-thirds of the planet’s output and income are engaging in containment policies that would – in normal times – seem extreme. But these aren’t normal times. COVID-19 as a medical shock to the economy It started in China with the first death on 9 January 2020, but spread quickly. The first case outside China was confirmed on 13 January (in Thailand). All the G7 economies saw their first cases by the end of the month (except Canada, whose first case was on 7 February). By the end of February (Italy) or early March, all the G7 nations had entered the accelerating phase of their ‘epidemiological curve’ (Figure 1 plots the number of new cases per day against time). Figure 1 Intervals, or phases, in an archetypical epidemiological curve Source: CDC.gov, www.cdc.gov/flu/pandemic-resources/national-strategy/intervals-framework-508.html 2 Introduction Richard Baldwin and Beatrice Weder di Mauro The epidemiological curve, which is widely used by public health officials, is not an exponential curve but looks like one during the accelerating phase.1 It started in China with the first death on 9 January, but spread quickly… All the G7 economies saw their first cases by the first week of February. By early March, all the G7 nations had entered the accelerating phase. ‘Epi charts’ are noisy given the inherent medical randomness and measurement and reporting problems. The size of the medical shock is easier to see in a different curve, call it the COVID trajectory chart (Figure 2). This plots the log of the cumulative number of cases on the vertical axis and, on the horizontal axis, the days since each country reached the (somewhat arbitrary) threshold of having 100 cases. The ‘log scale’ means that a straight line in this chart indicates the number of cases (cumulative) is rising at a constant growth rate.