Containing virus key to economic recovery, says Maurice Obstfeld

Measures designed to contain the coronavirus pandemic are also the most effective way to safeguard the world’s economies as the coronavirus will continue to batter international markets until a vaccination is discovered, Berkeley University economics professor Maurice Obstfeld tells Kathimerini.

The former chief economist at the International Monetary Fund believes that a return “to more tolerable activity levels by midsummer” is possible, yet warns that the current crisis could be worse than the 2008 financial crisis. He also believes that measures adopted by the United States and Europe to prop up their economies are in the right direction.

As far as Greece is concerned, Obstfeld says that the crisis “warrants an exceptional support effort at the European level” as the country is vulnerable on multiple fronts, while warning of a fresh migration crisis.
 

How intense do you think the recession caused by the coronavirus crisis will turn out to be? Could it be compared to the 2008 financial crisis?

Potentially this crisis could be worse than 2008. Unlike that crisis, which originated in the financial system, this one comes from a serious global negative output to real GDP, the coronavirus, with effects that threaten to spill over and destabilize the financial sector.

Do governments in the United States and Europe have the means to deal with this economic crisis in an effective way? How do you assess the measures that are being taken?

The most important and fundamental response to the crisis is to control the spread of the disease by widespread testing, tracking and separation of those infected and their contacts. The US and Europe both were behind the curve on this, but now are somewhat catching up, with more success in some of the European countries. The interventions of central banks have been important, and fiscal rescue packages were also necessary and likely will need to be expanded (as is already happening in Italy).

How fast do you think the economy will recover? To what extent do you think Western economies will be able to recover in the third quarter of this year?

If we could dramatically contain the spread of the virus quickly and institute a system of widespread testing and tracking, then the prospects would be good for returning to more tolerable activity levels by midsummer. But that timetable also depends on continuing strong policy support, to keep small and medium-sized firms in business and to provide households with basic shelter, food, utilities and healthcare.

Restrictive measures prompted by the coronavirus pandemic have created an unprecedented situation globally, making it difficult to combine the protection of public health with the protection of the economy. Is there a point in when quarantine measures would cause irreparable damage to the economy?

Unless there is an effective containment of the virus – at least until better treatments and especially a vaccine arrive – the economy will not recover well and this will have longer-term negative effects.

In your opinion, will this crisis affect the globalization of the markets in a decisive way? If so, in which direction?

I think businesses may want to diversify supply chains more broadly. But I don’t see why a general reshoring of business would suddenly become attractive after this crisis. Where I think there could be a greater effect is in international cooperation, notably in the area of trade. Some of the actions countries have taken in this crisis – for example, restricting exports of protective medical gear – may leave a bitter legacy and make countries more prone to trade restrictions.

What will the coronavirus crisis mean for nonperforming loans and how should banks that were already facing a high stock of NPLs react?

This is not the moment to solve the NPL problem that is still widespread in a few European countries. So, in the near term, I expect more regulatory forbearance. The key thing is to keep enterprises in business and keep workers attached to those firms.

Greece had just begun to recover and now the virus is expected to severely affect tourism and other areas. How do you see this new crisis progressing?

Greece is vulnerable on a number of fronts, not only tourism, but also shipping. The crisis certainly warrants an exceptional support effort at the European level, however. In the interest of not only the economic health of the EU but also its future solidarity, I hope that happens, and if so, Greece would benefit. We also have to worry about the likely devastating effects of this health crisis on poorer countries to the south of Europe. If the health disaster provokes outward migrations, Greece will again be on the front line.