English
Reporter: What impact will the coronavirus pandemic have on the economies?
Daniel Dăianu:Just like everywhere in Europe the impact is extremely severe. I have doubts that there will actually be a V-shaped evolution of the aggregated economic activity (of the GDP), with symmetrical slopes, since there are sectors which will not recover from this crisis for a long time. Tourism will be badly hit until an efficient vaccine is found. Nor will restaurants, entertainment venues, see the large numbers of customers they used to have, for the same reasons. Companies that transport people will be affected, as they are services that involve people sitting closely together. Internal and external supply chains are affected, which will only be partially rebuilt. Cross-border supply chains which were going to be "deglobalized" anyway - for geopolitical and system resilience/robustness reasons. The coronavirus crisis has weakened even further the "just in time" management system, which applies to specialization and minimizing costs from a global perspective. Why do I say that, because, "just in time" involves a smooth functioning of the markets, without conflicts and sudden shutdowns, without "black swans".
The turnaround will reveal changes in the physiognomy and physiology of the economies, with differences depending on concrete structures.
There are major social implications, induced by the number of people losing their jobs, or who are partially unemployed. The social issues will be more acute in areas where income social disparities are the deepest; not even the most economically advanced countries aren't spared.
I want to be wrong and for the economic turnaround to be as quick as possible.
Reporter: You spoke about an epidemiological cycle in the fight against Covid-19...
Daniel Dăianu: Yes, I think the war against this virus can be judged through the lens of such a cycle, which concerns the evolution of the pandemic and which illustrates how efficiently it can be controlled and in the end, defeated through treatment and vaccination.
The evolution of the cycle depends on the rules / restrictions imposed by the authorities, but also on compliance, on the way in which the citizens respect these rules, on "social distancing". The more effective the control of the pandemic, the faster the restrictions can be relaxed. Buft here the balance is fine, the subjective element intervenes in judging the facts, and the medical experts have a prominent voice.
You can't keep the economy's engines idling forever. But being too eager to restart things can mean things will turn ugly quickly, from a medical point of view.
When I say engines, I am referring to some of them, because there are areas of the economic activity that are still functioning. And I'm not referring just to teleworking. It is not possible to provide a "one-size-fits all" guide for resuming operations, that is applicable to all countries; much depends in decision-making on local circumstances, the ability of medical systems to respond to that effort, and the discipline of citizens.
Returning to work will not mean that everything will be as before; In addition, rules of social protection and distancing are likely to be maintained until we have the (one or more) miracle vaccine.
Reporter: Do you think that the current crisis caused by the coronavirus pandemic will be more severe than that of in 2008?
Daniel Dăianu: I think so, through implications and what it foreshadows. Economic recovery will be more difficult; social problems will be felt more acutely. You don't have to have an ideological bias to see that.
The means of economic policy put in place try to mitigate the impact of what we have called the "shutdown effect", but will only diminish effects which were inevitable. The argument here is that the logic of the shutdown, even partial, requires people to stay home. While a normal economy involves the free movement of factors of production. In terms of consequences, the indebtedness of many states and companies, large and small, will increase. The fact that real interest rates are very low, often negative, cannot hide the fact that we do not have an actual solution to over-indebtedness, public and private. And the fragility of economies will persist until we make economic structures that are better able to withstand future shocks.
Some countries are resorting to massive money printing to support the economy; The Fed has become a kind of "buyer of last resort" in all financial markets, exceeding the range of unconventional operations it used to perform during the Great Recession. But this is possible where central banks issue reserve currency. Although it is not clear how long they will be able to work this way. It can be stated, however, that these are exceptional measures, which will be abandoned at some point. Inflation is likely to rise in the future if there is no longer such a strong preference for liquidity, for cash. It is debatable what the conditions would be for such a thing to happen.
The erosion of the middle class, a phenomenon hastened by the Great Recession, is likely to continue, which is ominous. Especially since the authoritarian temptations are intensifying. Last but not least, because we will encounter new crises (nit just medical ones).
We also have dramatic climate changes, which are having major consequences for society and which require the options of difficult public policies, with unusual economic costs. And in the background there are changes of the economic relations in the world, which is accelerating a defensive syndrome, of looking inward - which is noticeable across the Ocean and even in the EU.
Reporter: Can the crisis be fought with traditional economic means?
Daniel Dăianu: Monetary policies have little effectiveness, as the decline in GDP is mainly due to the shutdown effect. It is not an ordinary economic shock, on the supply or demand side. That the shutdown effect induces domino effects on both sides is another matter. Fiscal incentives also have limited effectiveness because they operate in this logic of a shutdown of the economy, partial though it may be. You can't tell a man to stay in the house and, at the same time, urge him to work harder, to spend more; I am not referring to teleworking, where that is at least conceivable. As I said, traditional methods have more the role of mitigating severe economic and social consequences - such as furloughs, the impact on small and medium enterprises. The aftermath of this crisis will be felt for a long time.
In 1994 I wrote a study at the IMF in which I showed that arrears can be seen not only as financial indiscipline, but also as a way for a system to respond to a major shock given its inability to restructure quickly - that they are some kind of antibody (that's what I called them), some kind of pseudo-currency. This is what happened to advanced economies facing the great financial crisis - when huge liquidity injections (QE programs) were performed, as immediate large-scale restructuring was not possible. A failure of unregulated financial markets has led to non-standard central bank operations and increases in public and private debt, which have not resolved substantive issues. We have continued, as they say in English, to "kick the can down the road."
The current pandemic brings a second round of massive injections of liquidity. This time too there is a limited capacity to respond to the major high shock - to the effect of economic shutdowns, but that is not surprising.
Reporter: What do you think about a recession in Romania this year?
Daniel Dăianu: We can work with several scenarios. The government is considering a decline in GDP of about 2% of GDP. A more plausible middle ground scenario would be a decline of between 4 and 6% of GDP, with a significant "shutdown" effect in March, April and maybe even in May. The budget deficit in the middle ground scenario can easily go beyond 7% of GDP. One can imagine an even worse scenario. The economic recovery will be more visible in the fourth quarter of this year, if we control the pandemic. And the economic recovery will be stronger next year, especially if the vaccine exists. The economic sectors will be influenced by the contraction, as well as by the recovery, on a case by case basis.
Reporter: What can Romania do under the current conditions, so that the effects of the crisis are as small as possible?
Daniel Dăianu: The fight against coronavirus is the war to be fought now, which requires the mobilization of internal resources, the restructuring of the budget in order to respond to the need for public intervention in this fight.
Measures can be taken to support the economy, of course. But we cannot do what is being tried across the ocean, or in Germany, or even Poland. The fact that we are weaker economically, having tax receipts among the lowest in the EU (26-27% of GDP compared to the EU average of 40%), the leu being a non-reserve currency, the country's rating (immediately above junk), large deficits (domestic and foreign deficits) are strong constraints.
The argument that public debt is reasonable (about 35% of GDP) is of limited relevance. In 2008, Romania had a public debt of about 15% of GDP and was still threatened by insolvency due to the acute liquidity crisis and the freezing of markets, etc.
Regarding the programs worth tens of billions Euros, the way they are proposed, they must be accompanied by resources to rely on. To think that we can borrow such amounts at the moment is more of an academic exercise. This year's budget deficit alone can be the equivalent of more than 15 billion euros. Romania is the only EU country now right now going through the excessive deficit procedure. And the Council's decision was announced in early April this year, when fiscal rules in the EU were suspended. In other words, it is one thing to fight the pandemic (which involves additional budgetary resources), to have a large budget deficit induced by the inevitable economic decline and another to have a structural deficit that continues to increase due to increased permanent spending (speaking of the 40% increase of the pension point, since we're on the subject).
The issue of financing the public budget through massive acquisitions of government bonds, as if the size of the budget deficit does not matter, along with radical cuts in the interest rates, ignores that doing all of the above can cause a crisis of the leu, and lead to things getting out of hand. However, the NBR can help the functioning of the secondary financial market, which may involve the purchasing of government securities. Here we see, among other things, the effects of large pre-pandemic deficits and very low budget revenues.
If we won't be able to raise additional funding from the markets, we could end up with a rescue package comparable to the one in 2009-2010, but some thing like that can come with pre-conditions. It can come to that...
Reporter: You have proposed a solidarity tax...
Daniel Dăianu: We want others to help us, mainly the EU. But we don't really want to help each other. Everyone seems to be out for themselves and that's it. I have seen the reaction to the proposal to resort to a solidarity tax in this very difficult period, which would apply to incomes (so not only to salaries) that exceed a certain threshold - an essential form of progressive taxation; medical staff and those who ensure the public order would be exempt from this surcharge. To describe such a tax as populism, or socialist propensity, is nonsense. It would mean that everywhere in Europe where there is progressive taxation there is socialism. Just like in the USA, where there is progressive taxation, would also be socialism. I won't even mention that the automatic stabilizers, which allow the accumulation of reserves in good times, are stronger when they are based on progressive taxation. Such a tax would allow the distribution of resources to those who are more inclined to consume, or where the needs are greater; it wouldn't hinder demand, as some claim.
Decency in a society is also measured by the degree to which the strongest, richest, most capable are willing to help others. Solidarity cannot be limited to the gestures of some citizens, NGOs and companies, of the Red Cross; a public policy approach is also needed.
Reporter: What would an outline for an economic program look like, in the current circumstances?
Daniel Dăianu: It should be mentioned from the beginning that support does not only mean injections of liquidity, a bigger deficit; there are also state guarantees that can help considerably and here you can imagine more than has been proposed so far.
I will repeat now what I've said in public discussions. The Romanian state can "target" and allocate as rationally as possible its own and borrowed resources. In concrete terms, that means:
- the increase of the budget deficit has to be strictly the result of the fight against Covid19, unemployment and support for some economic sectors;
- the combat against the coronavirus is the top priority and must be supported with every means necessary;
- the creation of sectoral room for maneuver in the budget; that is where the rectification of the public budget comes from;
-encouraging production which can replace imports, including medical equipment, agrifood products (the state reserves to be increased via acquisitions);
- the aid shouldn't be granted to everybody; the temptation not to pay is big even one can actually pay. The state budget cannot be a bottomless wallet;
- foregoing the raising of individual wages, the permanent budget expenditures;
- supplier credit is very important in Romania and it would be very helpful if companies were able to monetize receivables via banks, aside from having the benefit of state guarantees for working capital and investments. An explosive growth in arrears would exacerbate the decrease of state budget revenues
- the maximum absorption of EU funds and the use of long-term loans from the international financial institutions, which would support investments, the economic activity. Billions of Euros from European grants can be used, loans can be taken out from the EIB, the World Bank, the EBRD, and the quota from the IMF can be used. And we won't have the burden of co-financing for the EU funds;
- concluding a currency swap agreement with the ECB;
- the European money can finance the rebuilding of the irrigation systems, which is becoming an emergency given a potential food crisis in the coming years. Just like the European money can help finance infrastructure works;
- reannouncing the cut of the structural deficit in the coming years;
-commercial banks should forego paying dividends and bonuses during the crisis (as the ECB has recommended), to increase the liquidity which can be used for granting loans; that also applies for state-owned entities;
- the dedicated facilities (with a negligible cost) of the ECB, for supporting SMEs, to be extended by bank groups in Romania as well, at least for loans granted in Euros. Such measures would be part of "burden sharing" during these very difficult times;
- the government should issue bonds bought by citizens and companies. In other words, not just have them be bought by banks as proxies;
-persuading private pension funds (2nd pillar) to buy only government bonds and financing infrastructure works (the ASF should issue a special regulation for this period of major difficulties); the funds should not make investments abroad.
Reporter: Could it be said that there are areas where this crisis brings with it opportunities?
Daniel Dăianu: Yes. Computerization will be stimulated. Teleworking as well. The agrifood industry will also be stimulated a lot, given the food issue, which is also connected to the climate change. That industry needs to be supported by the government. And major European grants can be used for that purpose as well. Our land is a very valuable asset.
Reporter: Some politicians argue that this crisis may be an opportunity for a restart of domestic industry and production. What is your take on that?
Daniel Dăianu: : I agree with this train of thought. I have never been a supporter of the vision of unrestricted globalization, and I have often said that development involves using markets and, at the same time, defeating them, no matter how oxymoronic that idea might seem. We need robustness, a stronger domestic production in core sectors. Such a philosophy of economic policy is not against membership of the EU, but takes into account the economic and political reality, the need for a member state to have intrinsic strength, which can not be achieved only by what the Single Market entails. And leverage is needed for that.
A solid public budget is needed, with fiscal revenues of over 30% of GDP; those who believe in minimal government, in the lowest possible taxes, do not understand that this health crisis shows "that the emperor is naked" and it does not concern just an overwhelmed medical sector (as it is almost everywhere in the world).
A sound public budget would also allow for industrial policy measures.
We need a development bank, like the ones that exist in Germany, Austria, Poland, Hungary. It's like we're orphans when it comes to mobilizing resources for investment. You can't just rely on the EU budget. Our neighbors in the region have understood this for some time. And the notion of "state aid" has limited relevance. The EU is not a level playing field. We see that Germany and France, when it comes to industries that they consider strategic, are placing practical restrictions on industrial policy. But we need a much more robust public budget and smart public-private partnerships.
Reporter: But doesn't a more powerful state also mean risks? Doesn't Romania have the experience of communism, in that regard?
Daniel Dăianu:: Yes, there are risks. And in our country there is a hypertrophy of the state bureaucracy, there is a lot of cronyism. But having government intervention in the economy does not mean a socialist, communist state. That line of thinking is schizophrenic... For instance, it isn't the markets that are fighting the coronavirus, but the governments that are mobilizing the resources. And it is no coincidence that we mentioned progressive taxation in this context.
I think everywhere a rethinking of the relationship to ensure more resilience when it comes to future shocks; whether it's epidemics, natural disasters, the effects of climate change, extreme events in general. Medical systems will be strengthened. The homeostasis of systems cannot be achieved through market forces alone.
We may see another "New Deal" in economic and social life in advanced economies, following in the footsteps of what the Franklin Delano Roosevelt administration brought to the United States as a vision and which had reverberations after WW2 in Europe. We see that in the EU, Mrs Ursula von der Leyen and other European leaders are talking about a new Marshall Plan. Romania must be part of this plan, which must not be applied only to the Eurozone. But we need to do much more and better at home with our own resources.
Without a private economy you cannot have a free economy, democracy. That is where Keynes and Hayek agree. But completely unregulated markets easily lead to a concentration of dangerous economic power, abuses of a dominant position, economic and social tensions stemming from excessive inequalities, and a loss of confidence in democratic governance. What is worse is that anarchy, chaos, the loss of democracy can occur if power is taken over by undemocratic regimes under the motto of trying to stop the dissolution of the state, of the institutions. Here we must include the issue of fairness, which does not mean equality; it means equal opportunities, ensuring the protection of the most vulnerable. Otherwise we end up with an economic and social jungle. Mrs Thatcher's statement that there is no society but only individuals is an extreme and misleading simplification. And a lucid conservative sees the limits of this formulation. And we often forget that man is the most aggressive being... through the impulses and weapons he possesses. Let's not forget the hot wars of the last century, which made the totalitarian regimes.
Reporter: What is your take on globalization?
Daniel Dăianu: The coronavirus crisis will accentuate, in my opinion, the eradication of the paradigm of unrestricted markets - that "light touch" regulation. The financial crisis has shown how fragile this approach has been, which has led to over-financialization, over-indebtedness, the use of toxic financial products that have amplified systemic risks and the extraction of undue annuities, exacerbating social inequalities. Now, a terrible health crisis shows not only how unprepared - everywhere in the world - we have been for such a confrontation; it also shows flaws that need to be remedied in the operation of the systems. It seems like we are at the end of a very long Kondratiev-type cycle, with major economic and social disruptions.
Reporter: How do you see the world after this pandemic?
Daniel Dăianu: Changes generated by computerization are likely to accelerate in post-crisis economies, with a rethinking of production chains that places more emphasis on robustness / resilience, on local and regional roots. It is not clear to me what the exit from over-indebtedness will be, even if some will say that the Japanese experience shows that one can live with very large debts. But Japan is a special case.
The place of public health systems in modern society will be re-evaluated, given that other viruses can attack us. The current pandemic has hit us hard, too, because we haven't paid enough attention to the lessons of SARS and Ebola; humanity does not have to be unprepared, from that point of view. More resources need to be allocated to public health and inclusion in social and health insurance systems is needed.
The problem of fairness in the functioning of economic systems will become more acute. The corporate world will have to take seriously the issue of "social responsibility" which is so often invoked business school textbooks. Taking into account other stakeholders, not just shareholders, will have to become something concrete. This observation also concerns the financial industry. To a large extent, the financial industry has not changed its business models (although banks are better capitalized) and risks in the so-called shadow-banking have increased exponentially.
Lifestyle will change. It is not clear to me to what extent the "acquisitive" nature of man can change. We will have to find a better balance in our relationship with nature.
A rethinking of the way we way we think about protectng global collective goods - pandemic protection being an eloquent example.
The effects of climate change require international cooperation and adequate resources in national budgets. How will all the economic and geopolitical rivalries be affected remains to be seen.
In order to be what it officially claims to be, the EU, cannot be reduced to a "single market", which has its own shortcomings. Unless it changes its governance mechanisms, if it does not show solidarity in difficult times (it is disconcerting how Italy and Spain were treated in the current health tragedy), it will lose relevance. Solidarity is needed in general, "financial solidarity" in particular (involving risk-sharing schemes). It is good that resources have moved through the EU budget (funds dedicated to the fight against coronavirus) and the EIB. But those things are not enough, in my opinion. The entire EU budget should be rethought, because the world, presumably, will no longer be what it used to be in many ways.
Reporter: Thank you!
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