Misc 22/11/2020

Alas, it is wise to be prudent

Andreu Mas-colell
3 min
Ai las, és prudent ser prudent

We should be optimistic. The second wave of the pandemic will be less severe than the first, and it is accompanied by a light that is shining more and more at the end of the tunnel. The vaccines are coming and everything indicates that, in combination with the spirit of survival, they will be quite effective. Winter will still be winter, but summer will be summer.

However, we are not optimistic, and everywhere the air has become clouded with an uneasiness and tension that has its roots in the economic impact of the covid containment measures. It is a discontent that fills the political and social horizons with uncertainty. Thus, in Catalonia, it has, in my opinion, shifted the main question of the February 14 elections from: "Which independence party will have the presidency of the Generalitat" to "Will independence have an absolute majority of seats". I assume that, if this is not the case, we will have, like the Barcelona City Council, a two-party system with occasional external support.

There is a fundamental reason that has exacerbated the malaise. Europe has made us understand that we would have the resources to stop the coup and, indeed, the resources, at the moment in the form of loans at a very affordable rate, are coming in abundantly. Even so, the public perception is that they are insufficient, and episodes such as that of the self-employed workers' subsidies can only confirm this impression. We have to ask ourselves: why, if it would lower the tension at a relatively low cost, would Spain not go further into debt?

For those responsible for macroeconomic management, going from a debt of 100% of the GDP to one of 120% is hard for them, but considering going beyond that makes them afraid. The problem is that Europe does not speak clearly enough. For every authoritarian voice that tells us that we can get into debt, and which we legitimately interpret as encouraging us to do so, there is another one that tells us to be careful. In fact, even if all the European voices were to encourage us to spend, there would be reason to be moderate. Because it is one thing to tell us that we are spending, and that Europe will be able to cope with it, but it is another thing to tell us that when it comes down to it, this is true. The doctrinal mood of northern Europe is not Keynesian. When the crisis passes, perhaps soon, the European Commission, which is very much aligned with Germany, will continue to be committed to the Next Generation, at least because it offers a chance to finance the European Green Deal, Von der Leyen's star programme. The aid we receive as a transfer will be highly conditional. But the Commission is unlikely to consider going further. We must add that European governance is so fragile that its credibility is limited. Surely the blackmail from Hungary, Poland and Slovenia, which threatens to block European funds, is an incident that will be overcome. But at what price? And next time? You don't have to be a great expert in strategy games to understand that a system based on unanimity is very difficult to manage by the main players - and therefore unreliable.

The ideal situation for our financial managers would be one in which the EU would irrevocably commit itself to a very generous policy of providing liquidity which, moreover, would not have negative future consequences for the recipients. The natural way to do this would be through transfers, not credits (although there would have to be ECB bridging credits). Then the vertigo of increasing debt would disappear. On the other hand, the money would not be able to come at the recepient's will. It would have to be associated with the financing of economically and socially sound projects. In this sense there would be a logic of rescue. But in order to implement this scheme, the EU would have to get more indebted than it has planned to do, which is a lot to ask for when the member states have barely made the first step. Or it would require the ECB to monetise part of this future debt. But I know quite well that this, however economically justified, is impossible. It would not be acceptable in the North and, I am told by those who know about this, it would be totally illegal, as the Karlsruhe Court would be quick to point out. One alternative, which was talked about a great deal months ago, and now very little, would be perpetual debt, that is to say, money injected into a Member State is recorded as debt and they pay interest, but the sword of Damocles of having to refinance disappears. But I don't think we'll see that either. In these conditions, alas, it is wise to be prudent.