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Is there life after death?

Published at: 18-04-2020

Posted on: April 18th, 2020 by RaduC No Comments

The tens of thousands of views that “The countdown has started!” post has received are for me the measure of impatience and hope with which the public waits for even a partial return to an economically active life, aware that the current situation can only be temporary. It can only be a short-term solution that, the longer it lasts, the higher the risk of deep and harmful effects on the economy, similar to an economic ‘death’.

This is why I think it is worth taking a closer look at how the return to work and social life is set to happen. The answer lies in the very reason of us having to stay home. We are basically dealing with two as yet unresolved issues: the ability to detect and isolate the sick and the under capacity of hospitals to treat all those in need of medical assistance. Hence the three critically important conditions that the European Commission identified that would allow Member States to lift containment measures and resume economic activity: a) reduction in the spread of the virus, b) large-scale testing and higher monitoring capacity and c) setting up a significant reserve of medical capacity.

So, for the economy to stand any chance of a safe restart, we have a maximum of two months to meet the three conditions. To be honest, though, the three criteria will not guarantee a return to pre-containment normalcy. Fears will continue to haunt both employers and employees. The spell that we are going through will have businesses realize that people are in fact the weak link in the production chain. The famous adage “people are our most valuable asset” could for some take the meaning of “people are our main vulnerability”.

At the end of the day, it is not the human viruses that attack machinery and robots (other kind of bugs is at play there…). This is why, before any fundamental changes to current economic models occur, the pandemic will act as an accelerant of some trends that pre-existed the crisis. That is clearly the case of digitization and robotization. Companies are therefore, expected to allocate in the near term vast amounts of money to tech upgrades that would reduce their reliance on human resources, in particular on those who need to leave home to get to the production site.

That would mean that only a portion of those left unemployed will find work, with the rest at risk of social and economic marginalization. These changes would probably speed up the introduction by some countries of a universal basic income meant to provide a standard of living on the verge of decency to those left out by the new economic make-over.

Businesses will also realize the following fact: supply chains will have to become more flexible, and bear the incurred cost. The just in time delivery model may lose its attractiveness as it becomes a significant weakness during times of crisis similar to the one we are experiencing. The poor management of a pandemic by a state that is the lynchpin in the production chain may bring whole industries in other countries to their knees, irrespective of their preparedness to respond.

In these circumstances I expect to see a rethink of the cost-flexibility balance where an increase in costs to achieve more flexibility might be considered acceptable. The lowest price will no longer be the priority, but whatever is more predictable, easier to control and even geographically closer. We are already seeing plans to relocate from China to other areas and European companies may be tempted to bring their offices back to Europe. Globalization may be replaced, at least in part, by regionalization. Such a trend may be boosted by lower reliance on human resources and therefore, lower human resource costs in emerging economies. Eastern Europe may benefit from these relocations, but the selection criteria cannot focus on labor costs alone, already on the rise, but also on the quality of infrastructure and HR.

Restarting the economy, however urgent, will involve mistakes and hesitations, the more so as new waves of the epidemic will occur until herd immunity is achieved and/or a vaccine is found. Studies thus far show that we should expect to live with SARS-COV-2 and not its disappearance in the next months. This entails more moderate measures of social distancing to allow for progressive and manageable immunization of populations. It could also mean that countries where contagion has been limited may see a stronger second wave of infections.

Which countries will be the most prepared to resume economic activity? Those which not only have robust detection and treatment systems in place, but also the ability to inject considerable amounts of money into the relaunch. A Bloomberg title sums it all up: “Germany Will Be a Post-Coronavirus Winner. Fiscally sound governments will be able to pump money into their companies unhindered by state aid rules.”

Romania, for example, which entered the crisis with a 4% budget deficit, the highest in the EU, due to the unfounded economic experiments of the past, will be in a bad position insofar supporting its companies is concerned. The calls from the business environment for financial packages worth 15% of GDP are unrealistic, as they cannot be financed at a reasonable cost. Romania’s low external debt ratio is irrelevant when that debt will have to be paid back from the lowest budget relative to GDP in the EU.

Actually, all countries that the crisis found in a frail fiscal position or highly indebted are now turning to the international financial institutions. IMF’s chief economist recently announced that 100 of the IMF’s 189 members asked for stimulus packages to help them overcome the economic shock. It follows that the $1 trillion worth of funds will have to be supplemented to cope with the requests.

The European Union will also throw in huge amounts of money to beef up the economies of Member States, EUR15.6 billion to be more exact.

Not all industries of the national economies, however, will start at the same time. The first to resume operations are those that cover people’s basic needs: food, clothes, services that help social distancing, etc. The ones to be among the last to restart will most likely be the non-essential services replaceable by activities providing similar benefits which, however, do not enable to socially distance. This category includes long distance travel, tourism, leisure activities that involve crowds, etc.

Restarting the economy, though, will not only rely on governments or external aid stimulus packages. Central banks will have a major role to play. The “money printing” policies are important, but they cannot go on indefinitely. Interest rates are already low, so further drops will not bring new rewards. We may witness a rush for currencies competitive  devaluation that would render exports more competitive and help them bounce back.

In this context, countries such as Romania should want a weaker currency and drop the popular and especially institutional concern about the currency devaluation..

Have a nice weekend!

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