The whole world is watching, terrified, the spread of the COVID 19 virus. The health emergency which first started in China is rapidly spreading everywhere. Hospitals and medical workers in countries worldwide are being tested to the limits, with an ever-increasing number of victims and patients winding up in intensive care or undergoing sub-intensive therapies.
Alongside this dramatic escalation, in just under a month, bull stockmarkets flying high at the beginning of February came crashing down, losing somewhere between 25 and 40%. Slightly less but still significant were figures for corporate debt, and in particular, high yield categories. The curves depicting government yields were rising, accompanied by increases in the spread of government bonds of those economies with fragile public finances.
Just like what happened in 2008, it is economic policy that is called on to immediately react to events, in an attempt to minimize the brunt of the damage inflicted on national revenues and jobs. This goes for industrialized countries and emerging markets alike. The monetary system responded quickly to the challenge almost everywhere. First off, the Federal Reserve in early March reduced the interest level by 50 basis points; ssignaling ample support for secondary market flows – that of Government bonds.
A week later, the BCE (despite its communications roll-out debacle), approved a package of measures that in truth were quite exceptional, aiming to improve liquidity conditions and access to credit across the Eurozone.
In this context, one cannot help but underscore the huge difference between the USA and Europe, especially concerning fiscal policy. The Trump administration, anxious about having to confront both an economic and health crisis at once and with upcoming elections in November, declared a State of Emergency, thereby releasing 50 billion dollars for civil protection with huge amounts earmarked for resident citizens.
In Europe, or rather in the eurozone, one was left with the only option available – that of temporarily suspending the Stability Pact. The suspension of this European dogma stemmed from the events transpiring, of course, but nevertheless should not be understated: The Stability Pact's suspension could give way to a dialogue free of prejudices, serving as a foundation for a more cooperative future for European fiscal policy.
In any case, the absence of a central fiscal authority and a European balance is shining brightly (in the negative), leaving each single State to confront any difficult challenge on their own. Unless, of course, it's demanded that fiscal policy starts getting determined by the BCE.
Read full article at Luiss Open [Italian]