Only a massive state intervention can prevent a deep recession
Posted on March 27, 2020 at 01:15 PM
Dr Tom McDonnell and Paul Mac Flynn NERI
18 March 2020
In the past week it is estimated that up to 140,000 jobs have been lost across the Republic of Ireland economy owing to the strict control measures put in place to tackle the Covid-19 outbreak. The total is expected to reach over 350,000 in the next few weeks. In Northern Ireland, despite less stringent measures, an estimated 10,000 jobs in the hospitality sector are expected to be lost already. To put this in context, over the course of the financial crisis from 2008 to 2012, the Republic of Ireland lost 350,000 jobs while Northern Ireland lost just over 40,000. While it is hoped that the vast majority of these losses will be temporary, the long term impact of this crisis will very much depend on the actions we take now.
The covid-19 crisis is causing an economy-wide crisis that will require billions in emergency support from government. The immediate economic priority should be to prevent large scale job losses and a destruction of the economy’s productive capacity. Achieving this goal will necessitate large-scale supports for small businesses and manufacturers to cover their wages and maintenance costs for the periods when they are shut down due to Covid-19.
Representatives of employers, employees and government should come together to work out the appropriate firm and sector specific details. There will be firms for whom activity has slowed dramatically and there will be firms for whom activity has simply evaporated. For firms experiencing depressed demand, the Irish and UK governments should immediately introduce short-time work schemes to preserve jobs and skills within firms that can continue to operate but at reduced levels. Such a scheme would allow for reduction of working hours while supporting the income of the workers. These schemes proved effective in Germany and other countries during the 2008 crisis. For firms who face closure, direct government grants of sufficient scale and a postponement of tax obligations should be available to all such businesses that commit to decent work and to retaining their workforce.
Zero interest loans should be made available to tide businesses and households with cash flow problems through the next few difficult months. The ECB should open the taps across the Euro area by selling Eurobonds equivalent to 15% of the Euro area’s GDP and then allocating the funds on a proportional basis to Euro area governments as a once-off grant. This would of course require emergency legislation as the ECB would become, in effect, the lender of last resort. Euro area governments could use these funds to provide liquidity support for households and firms across the Euro area. If the ECB fail to act, then the Irish government should borrow the money directly. Borrowing costs are currently close to zero and the announcement by the ECD of a €750bn bond buying programme should keep them there. For Northern Ireland, the UK government have indicated their willingness to extend of borrowing to firms of up to £330bn (15% of UK GDP), though precise details of such schemes remain painfully vague. Northern Ireland also needs greater clarity on the scale of supports it will be able to make available to firms rather than relying on the drip-feed of measures adopted by the UK government.
When we move past the emergency phase of the crisis and where businesses and households can show permanent loss of income due to Covid-19 related shutdowns then the debts owed to their respective governments should be cancelled. This would help deal with certain payments such as mortgage, rent, utility and insurance without causing knock-on problems for other householders and businesses that would arise from postponements or cancellations of these payments.
Across Europe there have been varied policy responses to deal with this crisis. In Denmark, the government and employers agreed to 75-25 split in wage support for employees in impacted sectors. In France, the suspension of rental payments will significantly ease the burden on household incomes. However, almost all policy responses to date, have emphasised the need to retain the connection between employers and employees. We have the potential to make a rapid recovery from this crisis, but it is dependent on keeping as much of our economic infrastructure in place as possible.
We also have to acknowledge that while Covid-19 poses an unprecedented risk to life on the island of Ireland, the economic impact of this virus has the capacity to be fatal too. The speed and scale of the crisis that we are experiencing means that it will be very easy for a large section of our population to fall through the cracks of our welfare state and experience sudden and sustained poverty. If we move quickly and prevent this from happening, we not only prevent the immediate hardship, we also prevent a short-term recession from becoming long term depression.
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