Covidonomics : macro policy and the coronavirus

Abstract

In this essay I review the wide ranging macroeconomic policy discussion about the Coronavirus (Covid-19) pandemic. The containment measures in response to the virus are putting a substantial portion of the economy on freeze, constituting a combination of severe supply and demand shocks, with the potential to enter into a negative feedback loop and cause long term damage to our growth potential. Macroeconomic policy must respond by providing liquidity in order to keep affected firms and households afloat, but mainly by protecting their jobs and incomes, and spreading the economic costs of containment across wider society as an “insurer of last resort”. This calls for a large increase in fiscal deficits and public debt, for which central banks must provide a backstop. This kind of monetary-fiscal coordination could enable the necessary government borrowing. In the euro area, recognizing that the fight against the virus is in every member’s interest, fiscal risk-sharing must be intensified. At the minimum, this must happen through central bank money (via the ECB acting as lender of last resort to governments), but ideally through an explicit debt mutualisation in the form of eurobonds, as Europe pools its fiscal resources in tackling the common crisis. Displaying solidarity and unity at this challenging time is crucial for European integration to work.