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Fragile systems

Kees Vendrik, Chief Economist Triodos Bank

The corona crisis exposes structural weaknesses in the contemporary global social economic system, Kees Vendrik argues. Climate change, global loss of biodiversity and deforestation fundamentally change the global ecosystem, enabling the spread of viruses, leaving many vulnerable. Globally, millions of citizens lack access to basic needs, including care. Many countries struggle with deep divisions, social exclusion and inequalities of income and wealth. 

The outbreak has caused immediate and unavoidable economic pain. The disruptive effects are accelerated by the characteristics of the interconnected, global economic system and the high household and corporate debt. 

The political system is vulnerable, too. In the world order most of us are used to, the United States steered and supported international cooperation. This time, the US is mostly focussed on combatting the crisis within its own borders. It will require others, such as the European Union to show leadership on global cooperation and solidarity, collective financial support for the worst hit communities and countries, a common approach on this health crisis and on a free exchange of knowledge and patents.

Impressive policy response

So far, the response from governments and central banks has been impressive. Many governments focus on direct income support for suddenly unemployed people and try to address emerging liquidity problems by offering deferral of tax payments and freezing/abolition of tax fines and recovery interest rates to entrepreneurs and business organisations. In addition to these measures, both the US Federal Reserve and European Central Bank (ECB) launched new assets purchase programmes.

This will, at least partially, avert the worst of the economic effect of pandemic mitigation policies (social distancing) following the outbreak. But large parts of the real economy are hit by the crisis and the resilience of the eurozone may be tested again if there will be no quick economic recovery.

The fiscal position of some governments – like Germany and the Netherlands - is better than in the beginning of the previous decade and now allows significant additional government spending in order to support the economy. But other countries are worse off.

Access to additional capital at affordable rates will be key in meeting financing needs of more vulnerable member states struggling with the corona outbreak. 
Kees Vendrik

Corona bonds and QE for the people

One feasible option are the so-called corona bonds. These bonds, to be issued by the eurozone member states collectively, could raise funding for public needs. Backed by all governments these bonds can serve as a sign of solidarity and will help to share the burden. Not surprisingly, there is controversy surrounding corona bonds. 

While being a feasible option, corona bonds are a form of credit, adding to current high levels of (public) debt. We mostly need cash right now. This is where quantitative easing (QE) for the people could come into play. Central banks could finance directly newly issued state (or even corporate) debt or introduce ‘helicopter money’ to be handed over directly to citizens.

In previous years the economic recovery has been facilitated mainly by cheap credit. Today, it’s hard to imagine whether much additional credit on top of the current debt leads to a sustainable outcome, without returning to the austerity economics authorities attempt to prevent today. Even lower interest rates are likewise probably not feasible or effective. QE for the people, a direct transfer of money to the people, is an interesting solution.

The banking sector

The European banking industry overall is in a different position than during the financial crisis of 2008: it’s better capitalised and under stricter supervision, combined with improved risk management. But this does not apply to all banks, and some are at risk of failing. We need to avoid another massive bailout programme funded by taxpayers, which would only fuel populist parties.

We need an intelligent design of the public support programmes that are deployed now. For example, the new EU agenda for the Green Deal also offers leads for a support programme that includes the necessary transition to a net zero emission economy. The vital question will be which part of the economy do we take into the future.

Rebalance and reconnect

The corona pandemic is a terrible event. The global ecological degradation seems to be a fertile ground for this type of outbreak, while at the same time our economic system excludes many people, leaving them without the proper resources and social protection. 

The communities Triodos Bank has served in the last 40 years have a lot to offer. National and international recovery plans should build on agendas like the European Green Deal, on a redesign of the current food and agricultural system. They should reconnect finance and the real economy. We should work on markets steered by true prices and circular regulation, smart public investment plans and greening of tax systems, grants, financial regulation and trade regimes. 

We need to rebalance social, ecological and economic values to ensure the promotion of broad welfare and inclusion. The resilient economy of the future is based on stakeholder business models, being the leading model of economic development, respecting mutual dependence in good and bad times and being connected to the communities they serve.