The coronavirus won’t cause a recession

But the reaction of policymakers might.

The direct impact of the coronavirus on the economy is limited. Unlike disasters such as hurricanes or earthquakes, there is no material damage. Few workers have been incapacitated by the virus.

Once the spread of the virus is under control, the economy can recover quickly.

The greatest risk is that politicians and central bankers will let financial uncertainty get out of hand. The stock market has taken a hit. Some companies will need to defer payments.

Of course central banks cannot cure the disease. But they can make sure that people and companies don’t suddenly start saving like crazy. A contraction in investment and consumption would cause a recession.

Fed Chairman Powell has signaled that he is ready to intervene. In Hong Kong, the government will give every resident 10,000 HKD to support the economy. Maybe President Trump will hand out money during this election year.

If the European economy goes into recession this year, it will not be the fault of the coronavirus. Christine Lagarde, Angela Merkel and Mark Rutte hold the key to preventing a recession.

And in Europe?

ECB President Lagarde sees no need for an ECB response to the coronavirus yet. German finance minister Olaf Scholz want to suspend the “debt brake”.

A recession would be very bad for the credibility of the ECB (inflation will be too low) and for government budgets (lower tax revenue).

European leaders must act now. The ECB must signal that it is monitoring the situation closely. And governments, especially in Germany and in the Netherlands, need to get rid of their fiscal fetish.

If the European economy goes into recession this year, it will not be the fault of the coronavirus. Christine Lagarde, Angela Merkel and Mark Rutte hold the key to preventing a recession.

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