Economist and former Head of the European Central Bank, Mario Draghi, recently weighed in on the Financial Times about policies currently being floated to counter the effects of the Coronavirus. What can we learn from his analysis?
1. In the first place, Draghi isn't the first to say it, but it's clear this emergency is not a "classic" Keynesian crisis. When both aggregate demand is melting as fast as a snowball on a sunny day, falling victim to an income crash and uncertainty reigning supreme, as well as aggregate supply also falling prey to the break in international value chains and the consequent crash of orders.
2. Secondly, and this may be the only ray of light for cautious optimism, the orgin of the crisis is totally exogenous; that is, it originated outside our economies. This means that it can be handled however we see fit. Once the pandemic is behind us, we can take off quite quicky. We can then hope to see a V-shaped trajectory, with the brutal crash followed by an equally violent recovery. Our challenge? To avoid it becoming a U or even worse, L-shaped.
3. The challenge then for governments and central banks is to ward off temporary difficulties faced by businesses, that would otherwise be healthy, and keep them from failing. When the economy takes off again, we should make sure that the productive system has succeeded in having mitigated the damage caused. This would mean it would be able to be in lock step with an uptick in consumption and aggregate demand. In short, keep businesses afloat – especially those small and medium-sized firms who are unable by all means to keep up with their financial commitments. Whatever it takes – as has also been said.
Read full article at Luiss Open [Italian]