Posted by on March 21, 2020 1:43 pm
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“Will economic measures against the coronavirus be effective?”

By Hugo Pereira, courtesy of Civismo


We are, without a doubt, facing a historic moment. The coronavirus not only infected people, but practically all of the social spheres: politics, the economy, and even our own psychology. We have come to realize that we are not as invincible as we thought and that nature has more than enough power to curtail one of our fundamental freedoms: mobility. Something unprecedented in the recent history of our country. A “simple” virus, which is not even living, can not only collapse the health of a developed country, but also cause a serious recession. We are therefore confined, but perhaps the worst is yet to come, in the form of a more lasting event that would affect many more people: an economic crisis.


It is still too early to predict with maximum reliability how it will develop, although we can affirm that it will differ from that of 2008, as it is not a financial crisis or does not affect the payment system. We are experiencing a real shock, especially in terms of supply – due to lack of supplies – and demand (we only went out to buy the essentials). However, the “crack of 2020” has in common with the Great Recession an important aspect: uncertainty. This is perhaps the most important piece of our puzzle. Now more than ever, institutions need to bring confidence and tranquility to a hysterical and paralyzed market in the face of ignorance of what the future holds, beyond the conjunctural and short-term measures, which will be, without an iota of doubt, decisive and basic, sine qua non for recovery. And perhaps this is the most complicated. We do not tire of checking, day by day, that the current two-headed Executive systematically lies or hides from us, is absorbed in constant internal disputes and, even worse, has prioritized his partisan and ideological interests in the fight against a virus that it has become uncontrolled, after previously ignoring all the indications given by the WHO and other organisms. Thus, on March 8, he encouraged thousands of people to congregate in demonstrations and, five days later, we were no longer able to leave our homes under risk of a fine. Now, the virus is out of control and Pedro Sánchez, overwhelmed. And all because of his negligence. For this reason, beyond quantitative -economic- measures, it is essential that the Government take qualitative measures seriously. If the policies applied are correct, the economic crisis will be temporary, but requires drastic measures in the short term.



If the economic policies that are applied are correct and, as far as possible, confidence in the institutions recovers, everything seems to indicate that the economic and stock market crisis will present a graph in the form of a vee. That is, the fall, as we are verifying, will be -is being- abrupt, but the recovery will take place in the same way. Thus, and although it is still too early to affirm it, everything indicates that it will be a conjunctural crisis, that it will not become structural, and that it will require measures as short-term as drastic. The factors that will influence the impact that the coronavirus has on the economy are as follows: 1) the degree to which the crisis reaches, 2) its duration, 3) the time that the adopted mechanisms remain in force, 4) its intensity and 5 ) the destruction of the productive fabric that is caused.


Economic measures approved by Pedro Sánchez


The Prime Minister has released a battery of economic policies of which, despite not yet being articulated or knowing how they will materialize, we can do a first analysis. They start from the mobilization of 200,000 million euros (approximately 20% of GDP), of which 117,000 million come from the public sector and the rest from the private. They will be used as follows:

  • A line of guarantees to companies of up to 100,000 million. The State will become the guarantor of the operations.
  • Additional guarantees of 2,000 million for exporting companies, with agile mechanisms.
  • Measures to facilitate the restructuring of credits to agricultural exports affected by drought.
  • 30 million to vaccine research.
  • 600 million for the provision of basic services to autonomous communities and local authorities and, thus, guarantee basic supplies.
  • Moratorium on mortgage payments in situations of special vulnerability.
  • Armoring of Spanish companies so that those from outside the European Union cannot take control of it, taking advantage of their stock market failures.
  • ERTE flexibility: those considered as force majeure will be managed quickly. In addition, those companies that, instead of firing workers, take advantage of them, will be exempt from paying contributions.
  • The access of the self-employed to the benefit for cessation of activity will be made more flexible and those who go unemployed will be exempt from paying contributions.


Not all that glitters is gold


Despite the fact that these measures were celebrated very positively by the Ibex 35, which rose 6.3% yesterday, standing at 6,495 points at 4:30 p.m., there are still many unknowns to be resolved and, if not, This could all end on wet paper. 


Firstly, it should be noted that this huge amount of money (sold as the “largest mobilization of economic resources in the recent history of Spain”) is practically impossible to achieve. Sánchez has assured that 117,000 million euros will come entirely from the public sector. But you will have to specify where they will come from. There are only two possibilities: debt or taxes. Who, in their right mind, believes that Sánchez will get into debt for that amount? Or that we will get it through taxes. Therefore, many doubts remain to be cleared.


Second, the remaining 83,000 million will come, according to the Government, from the private sector. But how will you achieve that enormous amount of a business network paralyzed by the coronavirus? It would have to be explained.


Third, the State allocates 100,000 million to guarantee the credits. In other words, if a company negatively affected by the coronavirus requests a loan and cannot return it, the State will assume its losses. In conclusion, if no company requests loans or does not default, the government will not have to give a single euro. So this measure is more about cheap advertising than anything else.


Fourth, there is no lowering of taxes. In other words, the self-employed tax payment has been extended, but sooner or later, that money will have to be returned. Without interest, yes. But returned. 


Fifth, with the excuse of the coronavirus, you cannot go to the aid of all sectors. If we rescue those already unviable, we will be losing money. If these are unsustainable due to the incorrect use of their productive factors, incurring unnecessary costs, not having innovated, or for any other circumstance, subsidizing them will be absurd. Well, those resources that are being used incorrectly could well be destined to viable long-term projects and, with that liquidity, they will be able to refinance themselves correctly.


In sixth, if we dedicate 117,000 million public money to containing the crisis caused by the coronavirus, we will have to cut other items of public spending. We cannot spend the same as if the pandemic had not been triggered. Therefore, there must be a firm commitment on the part of the Executive that there will be a rational and efficient use of public money after the crisis has passed (and that it will not fall, as always, in partisan and ideological interests, that they will only get into further debt and generate a real structural crisis). 


And lastly, if Sánchez has succeeded in anything, it is in making ERTE more flexible. The Government has removed the obligation that the employer has to continue paying the social contributions of his employee, and it is a good measure. 


But the rest, unless they are explained to us, could all remain in a mere partisan promise, that it never materializes, like so many others.


Hugo Pereira is a student of Political Science at the University of Santiago de Compostela. He analyses and gives his opinion on current political and economic affairs from his blog, social networks and in various media for which he collaborates.