Barry Eichengreen: Economic recovery will be like a ‘Nike Swoosh’

The steep contraction of the global economy will be followed by a slow rebound as the coronavirus pandemic starts to subside, Barry Eichengreen, the George C. Pardee and Helen N. Pardee Professor of Economics and Political Science at the University of California, Berkeley, tells Kathimerini. The shape of the recovery, says Eichengreen, will be much like the “Swoosh” logo of the sportswear brand Nike.

On the subject of Greece, the former senior policy adviser for the International Monetary Fund says that it did the right thing in its reaction to the pandemic, but its comeback will rely on advances in the science related to the novel coronavirus.

Professor Eichengreen believes that the medium-term effect on international trade will be “only moderate,” as seen in the aftermath of the September 11, 2001 attacks on the World Trade Center in New York City, but sees debt crises and extensive restructurings as a given. He also projects a freeze in private investments, and discusses the differences between this and other historic crises.

What other period of history would you compare this economic crisis to?

All the obvious comparisons have their limits. The 1918-19 Spanish flu pandemic was less disruptive economically because economies were less urban and less interconnected. The Great Depression of 1929-33 and global financial crisis of 2008-9 were different because they started as financial crises before infecting the real economy, whereas this crisis started on the real side – with the virus and the lockdown – and will now spread to the financial side. World wars are different because they are quite literally fights for the survival of the nation, where this one is a fight for the survival of people, where the nation will – presumably survive. So, I find historical comparisons useful mainly for flagging what is different, not what is the same.

What will determine the final economic damage and when will we have a safe estimate on the size of the problem?

First and foremost, the epidemiology of the virus – will it die down in the summer, will it return in the fall, will it mutate, will those incurring it develop immunity? Second, our success at developing treatments and vaccines. The earliest we will have a vaccine is the beginning of 2021, and even that is highly optimistic. The earliest we will know whether the virus will return or mutate next year is, well, next year. So only then will we have a clear sense of the size of the problem.

Is a V-shaped or a U-shaped recovery more likely in the US and eurozone economies?

Neither. I’m more inclined toward a “Nike Swoosh” – the idea of a sharp drop followed by a much slower recovery – if all goes well, or alternatively a W-shape or succession of Ws, if we release our lockdowns too quickly or the virus returns.

How will international trade be affected in the medium term?

In the short term, very negatively, as we are already seeing. In the medium term, I think the negative effect will be only moderate. Many people predicted a sharp negative hit to trade after 9/11 – that governments would conclude that trade and travel were no longer safe and take restrictive policy action. The reality was that we developed new protocols (airport security inspections) and technological solutions (using x-rays to inspect shipping containers). Hence trade survived and, indeed, continued to grow. The economic arguments for trade are compelling, so I suspect that we will again find technological solutions that allow us to keep it going.

Are you worried that the current supply and demand crisis will turn into a debt crisis? To what extent do you think debt restructuring will be needed?

For many low- and middle-income countries, the debt crisis is already here. How much restructuring will be required will depend on the shape and extent of the recovery. As I’ve said, the latter are necessarily uncertain at this stage. My suspicion, based on my answers to your previous questions, is that restructuring will be extensive.

How do you assess the actions of central banks and what do you think will happen with interest rates?

Central banks have reacted well. They’ve been aggressive and prompt, more so even than in 2008-9. The need for monetary support will continue for some time. Inflationary pressures remain subdued. So, I expect interest rates to remain where they are for the foreseeable future.

Some believe that, in the months to come, private investment will give way to public investment, which will bear the brunt of the recovery. What is your opinion?

Firms are going to be reluctant to commit to large investment projects until they are convinced that the virus won’t be back and until they have a clearer sense of the shape of the post-pandemic economy. So public investment will have to replace the private investment that is lost.

Greece is an economy with particularly high debt and is also highly dependent on tourism. What can one expect for the Greek economy in the coming months?

Greece has navigated the crisis relatively well, but times will remain tough, since there is not going to be a rapid recovery anywhere. The European Central Bank will continue to keep interest rates on public debt low for the foreseeable future. Tourism will return once there’s a vaccine and once there are “thermometer guns” to take the temperature of travelers at each airport and hotel lobby. So, for its return there will have to be progress on both the scientific and organizational fronts.

What is the reason for the particularly high increase of the unemployment rate in the United States, especially in comparison with the eurozone?

European governments have done more to subsidize and otherwise encourage firms to hold onto their workers.