ifo President Fuest Warns of an Economic Crisis and Calls for a Massive Aid Package
Clemens Fuest, President of the ifo Institute, has spoken out in favor of drastic measures to help the economy in the coronavirus crisis. “We have to prevent the economy from sliding into a downward spiral of collapsing companies, job losses, and panic in the financial sector,” he writes in an article for the German newspaper Handelsblatt. ”The response involves a combination of massive support measures that must be targeted precisely and enacted quickly.”
“The current coronavirus crisis is plunging Germany into a complex economic crisis, the dimensions of which many people still underestimate. It is exposing the German economy to a simultaneous supply and demand shock. In addition, there is a risk that the supply of credit to the economy will be disrupted and that the sovereign debt crisis in the euro area will return,” Fuest writes.
“If economic activity falls to 65 percent of normal levels for just two months and then returns to growth as expected, this will shrink economic output for the year as a whole by 5 percent. That would be comparable to the slump in 2009, the year of the financial crisis. But things may get much worse.”
Fuest writes: “For many self-employed people and small and medium-sized enterprises, sales are falling to zero.” In response, governments should suspend all these groups’ tax payments for several months. Additional help for employees who lose their income is urgently needed. Liquidity assistance and state guarantees could avert a wave of insolvencies. The fact that this will also benefit international banks must not be allowed to hamper these moves.
Fuest adds: “It is inevitable that some borrowers will default. If banks lose equity as a result, capital regulations could force them to call in other loans as well, exacerbating the crisis. Banking supervision should therefore temporarily expand banks’ scope for action.”
He continues: “Public finances in the euro area are under imminent threat. In the case of highly indebted countries, this could lead to a collapse in confidence (...) Euro-area countries, and also the ECB, must send a clear signal that there will be systematic support for all countries and that there is no chance of sovereign defaults.”
