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David McWilliams: We must loosen up on financing pandemic spending now

If the EU, ECB and all governments meet this economic crisis head on, Europe has a chance

What is the global economy going to look like when this ends? Will the recovery be sharp and impressive as people come out of hibernation with a thirst to go back to normal, heading out, socialising and making up for lost time?

Or will we be traumatised by the great shutdown, afraid to mingle, worried about our financial precariousness and how close we were to running out of money? Will an appreciation of our own economic fragility change us profoundly?

Or will the very brittleness of our existence lead to a spur of curiosity and innovation based on the great idea that we have to change the way we run our economies, the way we regard and pay frontline public workers, and the way we reward and confer status on different jobs in our society?

These questions will be determined by what happens in the next few months economically, and what policies we deploy.


In painting a picture of the future, we might look to the past and consider how the world reacted to the last global flu pandemic in 1920. But first, let’s examine the near-term. The aim here is damage limitation.

The global economy is closed. Mass redundancies are upon us. Retail demand is gone, investment consumption, and talk of imports and exports all seem very 2019. Today, the State is the only player in the game.


Europe is worried about small companies, and this is particularly the case in Ireland because half of our private workforce work in small and micro-companies. (Small companies are those with fewer than 50 employees; micro-companies have fewer than 10 employees.)

Ireland has so many micro-companies because it leapfrogged the rest of Europe by outsourcing the creation of local larger companies to multinationals. In the 1970s, it was clear we were too far behind in terms of capital base, global networks and business expertise to build national world-beating companies.

This is something that only a few small countries such as Denmark, Holland and Sweden have been able to do. But remember they were all empires at some stage, amassing capital and know-how over centuries.

The upside of going for the multinational model is plain to see. The downside, arguably, is that the local corporate infrastructure remained overshadowed by the multinationals. So, side by side with global behemoths, lived local minnows, trading away, making money, employing lots of people, but always a little bit too precariously for comfort.

This sector is shuttered now and needs to be put on a lifeline by the State to ensure these small companies do not go bust in the shutdown. Moves to subsidize wages help workers, but small companies still have to come up with 30 per cent of wages despite having no revenue.

The only way I can see this working over a period of a few months is for a suspension of banking charges, a freezing of loan repayments and utility bills as well as "helicopter money" orchestrated by the European Central Bank. We've discussed this here in previous columns and it is coming.

Free money will cushion the blow, not just for small companies but also for the State.

It is absolutely essential that this emergency spending by the State, which might end up being close to 2 per cent of GDP, doesn’t push up debt/GDP ratios or usher in an austerity budget when this pandemic passes in order to rebalance the books.


After this, we will need to build houses, upgrade public infrastructure and address the anxieties of a population that can’t find accommodation at a decent price. Therefore, the central banks need to cover all national pandemic-related spending, without issuing any new debt instruments.

If this is a move too far intellectually for the central banks and they are still wedded to lines in a balance sheet, then they could issue euro bonds, as at least nine of the big European states are seeking.

Extra financing of European spending needs to be done through special EU-wide “Corona euro bonds”, which will require Germany and the Netherlands to drop their opposition to the issuing of multinational euro-zone debt.

At the moment the north and the south of Europe are at loggerheads. The south plus Ireland want euro bonds rather than having each country overburden its national debt levels. The north is afraid that the south won’t stop spending once this starts.

It’s not hard to understand the northern position, but what’s worse: a coordinated borrowing or the potential break-up of the EU? We all know which one we’d pick. The stakes have never been higher. European solidarity must win.

With that in mind, the ECB must promise to buy these IOUs, which will have zero interest rates. Once the ECB backstops these coronabonds, private investors will hold them, knowing the ECB will buy them in unlimited quantities if the investor wants to sell.

If the EU, ECB and all governments meet this head on, we have a chance in Europe. But who is going to help smaller, poorer countries? Looking out over the globe, there’s a significant chance that Asia – particularly China – will emerge as the global leader. China might become the global banker, lending to small countries. After all, America has a leader who doesn’t believe in helping poorer, small countries.


As China slowly gets “back to normal”, it could be in a much stronger position than the US as we head into the new decade.

The last time we had a global pandemic of this type, the world reacted in very different ways. The 1920s, following the 1918-21 flu pandemic, looked very different depending upon where you were living. The US reacted to the trauma with a decade of unprecedented prosperity, world-changing technological innovation and unbridled optimism. During the 1920s, the US economy expanded 42 per cent, and the country produced almost half the world’s output.

On the other hand, Europe descended into tragedy in the 1920s, as mass unemployment was followed in central Europe, particularly Germany and Austria, by hyper-inflation. The UK was in recession by the mid-1920s, when unemployment soared. Italy was run by fascists from early 1920s, and in Russia Stalin was setting up his purges.

The bedrock of the economic policy in Germany, the UK and France from the mid-1920s was the Gold Standard, which forced needless austerity on Europe. That’s the warning from history.

If we don’t loosen up on financing the emergency pandemic spending now, and entertain initiatives such as “helicopter money”, allowing central banks to simply print money to pay for everything, we risk a repeat in the West of what happened in the 1920s.

We all know that didn’t end well.