Back in January, we were all looking at what was happening in China. The coronavirus outbreak was hitting hard the country and his economy, entire cities were put under lockdown and the all world was observing how they were facing the emergency, with the hope and perhaps the illusion that all that pain would never hit us. We were wrong, the world was wrong.
We finally realized that globalisation has his side effects, that we are not immune to epidemics and we need to learn how to cope with them and other health crisis in the future.
Entire countries all around the world are now under lockdown, with tremendous consequences on the economy that we can only try to imagine, right now.
The difference between this and the other economic crisis of the past is one: the other economic and financial crisis have hit the demand side, therefore governments and financial institutions knew exactly how to deal with the shock and which measures to put in place to boost the demand and the GDP growth. This epidemic, and the consequent closure of entire cities and factories, has hit both the demand and the supply sides, therefore it is way more complicated for institutions around the world to find the right tools to deal with this matter.
While the magnitude of the crisis has not been assessed yet, some experts suppose that the world will face an even bigger recession than the one that triggered the 2007 financial crises, with a loss of 8-9% in the Italian GDP, according to an ISTAT preliminary study.
The reaction of the financial markets has been dramatic as well. The Dow Jones index tumbled in many occasions at an incredible speed, at the beginning mainly because of the price war on the oil market and then because of the coronavirus spreading in the USA, recording the worst daily performance since 1987 on the 16th of March. In Europe, the market’s reaction has been even more violent, with FTSE MIB recording the worst performance ever, losing 17% of the entire Market capitalization in just one day. But heavy losses have struck also the other stock markets, with panic-selling days in French, German and UK markets.
In response to the crisis, Governments and Central Banks have tried to mitigate its impact on the world’s economy. The Federal Reserve System has implemented his Expansive Monetary Policy, by cutting the interest rate and increasing the liquidity in the financial system. Despite the initial hesitations, the ECB has finally taken the same road, approving an extraordinary plan to help businesses and the financial system endure the crisis, and pledging for a Spreads control.
Moreover, expansive fiscal policies have been put in place by all governments as well, with deficit increasing, taxing cuts, payment delays and social shock-absorber in most of the cases, in response to factories closing and consumption fall.
Will it be enough? It is not an easy question. Much depends on how long the crisis will last.
For sure, the expansive measures must be kept for a long time after the end of the crisis.
This time, a unitary response is to be hoped, especially at a European level. The European Union is at a very important crossroad, and only its strengthening can lead to an orderly and quick solution to the crisis. Without a common approach, the long-term effects of the disease could be enormous, and the EU may not survive. As with all the biggest events that scared our existence, may this just be a springboard to a bright, more conscious future.