COVID-19: "Economics alone won't get us through this”

Jean-Pierre Danthine, an EPFL professor and the managing director of the Enterprise for Society Center (E4S), discusses the economic fallout of the COVID-19 crisis in Switzerland and worldwide, and argues that the future depends on government policy responses.
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According to recent International Labour Organization (ILO) estimates, the coronavirus disease (COVID-19) pandemic could cause up to 25 million job losses. As governments everywhere launch stimulus packages, softening the impact of the crisis on global unemployment will require effective and coordinated economic policy responses. “We have to make sure the effects of this unprecedented episode aren’t permanent,” says Jean-Pierre Danthine, a professor at EPFL’s College of Management of Technology and former vice-president of the Swiss National Bank. Danthine cautions that, if too many companies – including small businesses – go bust, future production capacity will be severely reduced. “We need firm policy responses to stop this crisis from having long-term adverse effects. Economics alone won’t get us through this.”

An atypical recession

Danthine is unimpressed by widespread talk of an impending recession. “Output will inevitably shrink because most workers can no longer do their jobs,” he says. “We shouldn’t be focusing solely on the numbers. It’s clear that growth will enter negative territory. We should be looking at the bigger picture. This isn’t a typical recession rooted in endogenous macroeconomic factors. It’s a slowdown in activity caused by an external shock. From an economic standpoint, our real priority should be to minimize the long-term consequences.”

Switzerland can ride out the storm

The Federal Council has so far announced a stimulus package worth 42 billion francs, including measures to protect jobs, guarantee wages and support the self-employed. Danthine welcomes the Swiss authorities’ response. “Switzerland’s short-time working compensation scheme is designed precisely to cope with circumstances like these,” he explains. “The country also has the financial leeway to ride out the storm, because the debt brake has significantly reduced federal debt in recent years. Now is the time to dip into these reserves. Doing so will leave the Swiss economy on a strong footing to recover once the COVID-19 crisis comes to an end.”

A gloomier picture for the EU

The crisis is hitting Europe harder than any other region right now, and there are serious concerns over the United States too. “Known weaknesses in the US healthcare system could make the situation there even worse,” says Danthine. “What’s more, the Trump administration’s response – cutting taxes to put more money in people’s pockets – is exactly the kind of measure we should be avoiding.”

The outlook for Europe is something of a mixed bag: while Germany has the reserves to get through the crisis, countries like Italy and France are on much shakier ground. Could we see an EU bailout package in a repeat of the 2008–2009 financial crisis? Danthine isn’t convinced. “The EU has the latitude to act, but I’m not sure the political will is there yet.”

According to Danthine, Asian countries like China, Singapore and South Korea have handled the crisis admirably and are well-placed to regain momentum.

Worrying signs for developing economies

The epidemic could have catastrophic health and economic consequences if it grips the world’s poorest countries. “Developing economies don’t have the same scope to respond as countries like Switzerland,” says Danthine. “We can only hope that the spread of the disease will slow, giving developed countries enough time to help their poorer counterparts once they’ve won the battle at home. But we have every reason to be concerned.”