The challenge of quarantining the world economy

The outbreak of an unknown virus in the city of Wuhan in November has escalated into a global pandemic, keeping a third of the world's population in confinement and crippling travel and the global economy. Just a month and a half ago the debate on the state of global finances was about whether there might be a small recession in 2020 or just a slowdown. The spread of the coronavirus has swept away that discussion and now there is total uncertainty among businesses and economists. No one knows for sure the effects of quarantining economic activity. 

Recession is assured in the coming months and the aim of the main economic institutions, such as the IMF, the World Bank, the G20 or the G7, is to prevent the world economy from chaining several years of negative growth. "We are in a very new situation. Certain parallels can be drawn with the stock market crash of 29 in the United States. The measures being taken by governments are along similar lines to the New Deal designed to alleviate the serious economic crisis of the 1930s," explains Begoña Casas, professor of business strategy at the European University of Madrid. 
 

Economic institutions have already announced measures aimed at guaranteeing liquidity for companies and helping to reactivate consumption once the quarantines are over. "It is necessary to support companies until activity returns and to facilitate their access to liquidity in order to maintain the productive system," illustrates Antonio Rueda, director of VASS Reserach and professor of Economic Structure at the Universidad Autónoma de Madrid. 

Rueda explains that the priority is to protect the productive system as long as possible through public investment. He also advocates increasing funding for the health system. "They are what are on the front line right now and it cannot be that they work without the necessary material," he says. 

For economist Jesús Ruiz-Huerta, director of the Fundación Alternativas laboratory and professor of public finance at the Universidad Rey Juan Carlos, it is difficult to find historical precedents for the current situation. He points out that wars can be a similar scenario, but the challenge in this case is global and comes at a time when the world economy was entering a period of economic slowdown. 

"Right now the public sector has to replace the private sector. It's time for expansive fiscal and monetary policies, the increase in deficit and debt is assured, but there is little room for maneuver," explains Ruiz-Huerta, who assures that economic manuals help little in the current situation. 
 

"This is the first great crisis of globalization and it forces us to rethink the excesses of the current economic system. We need innovative solutions," summarizes Professor Begoña Casas, from the European University of Madrid. 
One of the most tragic effects of the coronavirus crisis will be the destruction of jobs. The ILO (International Labour Organization) pointed out this week in a report that there will be a 7% drop in employment worldwide. Casas said that one of the possible solutions to the high rates of unemployment that will occur as a result of this crisis is to improve the training of workers. "This crisis represents an opportunity for people who have lost their jobs to retrain and learn new digital skills," he says. 

Ruiz-Huerta says that one of the economic effects of the coronavirus will be that the rules laid down by the Maastricht treaty to prevent European countries from running up deficits will be relaxed. "There will be a relaxation of the rules, the European authorities have already assumed that it is not possible to continue applying these criteria strictly," he explains. Although Ruiz-Huerta does not believe that coronabons are an option either. "The members in the north are not going to accept a mutualisation of European debt, we will have to find some intermediate solution," he says. 

Antonio Rueda, director of Vass Research, also points out that mutualising European debt is very complicated, although he does acknowledge that some kind of intermediate solution will be reached to minimise the economic impact of the coronavirus. Rueda advocates coordinating health actions among EU partners to jointly tackle the virus. 
 

When asked how long the productive system can resist the lack of activity, the experts' answers are not encouraging: "The recovery time and the necessary measures will be marked by the duration of the crisis. Hopefully this situation will only last two months, but if it is prolonged over time, the consequences will be catastrophic," predicts Professor Ruiz-Huerta. "Uncertainty prevents companies from making economic calculations. Governments are the ones who must give confidence and point out clear guidelines," says Rueda, who points out that the "positive" thing about this crisis is that it is not systemic, like the one that took place in 2008. 

One of the big problems that the pandemic will cause is that it will increase countries' public debt. "The debt of the nations was already very large before the expansion of the coronavirus," Rueda explains. 

Although the lifting of the quarantine this week in the city of Wuhan opens some hope for the countries in the West that are suffering from the scourge of the coronavirus, Rueda points out that in China the focus of the pathogen was very localized in a small part of the territory and the authoritarian political system has allowed them to monitor the population that would not be possible in Europe.