One of the main questions for determining the economic consequences of the coronavirus outbreak is whether the shock is only temporary, or not. In short, whether post-lockdown, the economy will bounce back to its previous level prior to lockdown, or if instead the free fall in income is just that – with losses not reabsorbed in the short term. It all depends on the number of Italian companies that will go out of business for the lack of liquidity given the stop in sales.
Businesses that fail require a greater amount of time and effort on the economy to absorb those losses, thereby prolonging the effects of the initial shock. Withheld payments can contaminate the financial system and infect other businesses, too; creating a domino effect across the entire economy which, in turn, can affect the few previously healthy sectors that had been left largely unscathed by the health emergency. From here, it would not be long for the NPL to grow, with the contagion afflicting the financial sector as well.
In these early stages, the primary goal of economics policy, then, should be to avoid any business failures. It's a goal we can all agree on, with our institutions issuing the correct response: Do whatever it takes. But in practice, it must be credible – and to be credible, we must be able to have an idea of How much it takes. To uphold a promise to do whatever it takes, especially given the current public debt held by Italy, could signify that the resolution is indeed not credible, and therefore be ineffective in providing the right response to the crisis.
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