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TUAC Briefing on the Coronavirus Crisis: Origins, Development and Policy Response

By International Trade Union Confederation, Yorgos Altintzis

Executive summary

The crisis caused by the coronavirus is proving deeper than initially expected, leading the OECD to constantly revise growth estimates downwards.

Representing above all a health emergency, the COVID-19 crisis poses an exceptional conundrum to policymakers: swift actions taken to fight the pandemic have negative effects on the economy, making macroeconomic counter-policies less effective in containing the recession. Different approaches are emerging: suppression versus mitigation strategies.

The economic crisis started as a pure supply shock, with China battening down to prevent the virus from spreading, and thus disrupting global supply chains. As time goes on and the coronavirus spreads globally, rigid containment measures depress demand, turning the supply shock into a classic economic recession.

Certain sectors, particularly in services, will not be able to recover for the lost time, no matter what: tourism, restaurants, hotels, air, sea and land transport are going through very hard times and will not be able to sustain current stress levels for long. The spillover effect on trade and investment could ripple across sectors and across economies.

Governments are responding through targeted measures prioritising businesses, in order to preserve their liquidity levels, such as credit guarantee schemes and tax deferrals.

On the employment side, measures include widespread temporary lay-off schemes and unemployment benefits, in addition to extended sick and parental leaves. However, measures to protect household income and jobs might prove insufficient.

Furthermore, the current size of interventions, roughly at about 1% of GDP, is not adequate to fight the negative impact of the recession, which could easily cost up to 10% of GDP in most affected economies.

By the end of the year, and despite measures taken to support workers and businesses, the prospects are of a massive surge in unemployment and social disruptions. Financial markets, which have been strongly rising until present, on the back of very accommodative monetary policies and quantitative easing, are already undergoing abrupt corrections and could well risk triggering a corporate debt bubble burst.

Is this crisis similar to the one in 2008? There are similarities in the urgency of the situations, but differences too, that point to further pessimism. Aside from monetary policy, which has run out of ammunition in a zero bound interest rate environment:

This is a crisis spreading from the real economy to the financial sector, not the other way round;
Labour market institutions are (even) less protective than they were in 2008;
Economies are even more interdependent through global supply chains;
There is currently a lack of appetite for international co-operation, which undermines the ability to effectively intervene on the global level in fighting the crisis.

Similar to 2008/2009, the crisis might see resurgence of bailing out operations and the controversies these create.

In the longer run, there is a strong need for rethinking and reforming the current economic model.

All the best,
Yorgos Altintzis,
Policy Officer,
Economic & Social Policy Department,
International Trade Union Confederation

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