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Whatever it takes

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“Whatever it takes” were the famous words pronounced by the former President of the European Central Bank in July 2012 to express his intention to support the euro, which at the time was on the verge of collapsing under the pressure of the debt of a number of member states of the euro zone. Those words did save the euro as they demonstrated clearly that the ECB was going to use all the tools it had at its disposal to save the situation, and the financial markets believed them.

Today the world is once more facing a situation where the leaders of each and every country are expected to say they will do whatever it takes to support their economy. Given the nature of the coronavirus and its spread, the answer needs to be a coordinated one. No country can go it alone. Analysts are saying that as things stand today, they cannot estimate when things will actually pick up. This is why governments have to say, “whatever it takes”.

Initially some said that the impact will look like a “V”. A fast downturn and a fast pick up. Thus, they were talking of significant drops in the gross domestic product, even in double digits, and then a strong pick up before the end of the year. Today that view does not seem correct anymore with the spread of the virus across the globe.

We cannot even talk of a “U” shaped cycle as we do not know when growth will come. The more people say that things will never be the same again once the health issue passes, the more it is implied that there will not be a pickup any time soon.

Some said that the economic impact will look like an “L”. So we will have a downturn which is then followed by stagnation. This implies that we can see an end to the downturn, which we cannot. So, from what we know today, this is likely to look like an “I”, a vertical slide downwards. Every component of aggregate demand (which is what drives any economy) is down. Consumption, investment in capital and exports can be said to be in a freefall.

Not even at the time of the Great Depression following the crash of 1929 and at the time of the financial and economic crisis of 2007 – 2012 (two periods which caused the stock markets to crash and which caused high unemployment), did the major part of economic activity shut down as has happened in the last weeks in China, Europe, North America and other parts of the world, and in such a short while. This is why governments have to do “whatever it takes” to avoid a complete collapse.

Data released on Tuesday shows that there has been “an unprecedented collapse” in business across the eurozone as EU countries impose severe restrictions on movement to slow the coronavirus. The Purchasing Manager Index Survey conducted in several countries is indicating that a number of countries will experience a deep economic recession. The Index suffered a decline that has not been experienced before.

The Group 7 (the seven most powerful economies of the world) have issued a statement that they will take all the necessary steps to address the economic crisis caused by coronavirus. They said, “We will do whatever is necessary to restore confidence and economic growth, and to protect jobs, businesses and the resilience of the financial system”.

This is a sure indication that we have reached the “whatever it takes” moment. Individual countries are taking steps, through both monetary policy and fiscal policy, to tackle the situation to try and stop the freefall in economic activity. I strongly believe that such a situation is best tackled collectively and not individually, and as such the world needs statesmen not politicians to take on the leadership role.

Lawrence Zammit

This article appeared first on The Times of Malta 




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