The different political responses to the economic consequences of the coronavirus pandemic. The cases of China, Japan and the United States. The European response, and the questionable approach in Italy and Spain.
The pandemic generated by the coronavirus has put countries around the world in crisis. This alarm isn’t surprising. Other epidemics have occurred over the past century, but in general they have had a limited impact geographically. According to experts, the new coronavirus pandemic has had only one devastating precedent with the so-called "Spanish flu" although it did not originate in Spain but in the United States. In any case, it was a huge tragedy. The epidemic caused between fifty and 100 million deaths at a time when the planet's inhabitants numbered around two billion, or about a quarter in respects to today.
The comparison helps us to realize the risk of a pandemic that extends globally without being able to know precisely the nature of the virus and how to eradicate it. However, there is no shortage of hopes of being right. In Russia and China, the development of a vaccine, already being tested with promising results, has been proclaimed. Other vaccines are announced based on ongoing researches in Europe and the United States.
China and the United States.
Whatever the future of an effective vaccine may be, the coronavirus has already caused disastrous economic, social and human consequences. The case of China, the first country to be hit, is significant. Although accused of not having revealed the true nature of the virus as soon as it was identified, China has shown a strong intervention which, thanks to its intensity and speed, has made it possible to stop the pandemic in less than three months in Wuhan , in Hubei province, where it first appeared, causing the loss of about 5,000 human lives.
If there is no serious upsurge, the country will be able to close the year, according to IMF forecasts, with a growth in national income close to 2 percent, placing itself as the only country that has faced the crisis without suffering a long term collapse of economy. Undoubtedly, the centralized nature of the regime affected the timeliness and decisiveness of the intervention, stopping the spread of the pandemic.
The case of the United States is very different. After Donald Trump's initial hesitation, the Democratic Party has imposed an extraordinary public intervention in the amount of three trillion dollars, equal to about 13 percent of the national income. The resources put in place have allowed the distribution of $ 600 a week also to people who already benefited from unemployment benefits. It was, in a sense, like throwing from a helicopter, according to Milton Friedman's famous recipe, a large amount of dollars to be spent to revive consumption and production. But the operation, which in a different theoretical apparatus, had also been suggested in the past by Keynes, proved to be disappointing. When the generous distribution of dollars ended in late July, millions of Americans were still unemployed and without wages.
The Democrats, led by Nancy Pelosi, president of the House of Representatives, had proposed a new three trillion intervention, but the Senate, with a Republican majority, had blocked it. So the daring therapy based on the distribution of money aimed at increasing consumer demand, as the engine of the recovery, has remained in mid- up in the air. And the future remains uncertain, entrusted to the result of the presidential election in November, when Democrats hope to dislodge Trump from the White House by replacing him with Joe Biden, a leader in many ways modest but with a great deal of political experience as a decades-long member of Congress, and then vice president of Barack Obama.
So, a different ideological vision of social organization and individual freedoms has vigorously manifested itself even in the face of the coronavirus and its devastating effects, as evidenced by the opposing experiences of the two major powers of the contemporary world.
The Japanese experience
In the rest of the developed world we are witnessing different experiences, which on the whole we can define as more pragmatic
The case of Japan, the third largest economy in the world, offers a shining example of the extent and speed of government intervention to defuse the spread of the pandemic. In the press conference on April 7, the Japanese position was illustrated in a few simple words by Prime Minister Shinzō Abe. "The Japanese economy”, he said, “is facing the most serious crisis after the Second World War ... The government has decided on an investment equal to one fifth of the national income" In essence, an immediate expenditure equal to 1000 billion dollars, To give a concrete meaning to the figure, it is like investing in Italy, with a population that is half that of Japan, about 400 billion euro, or about 300 billion euro in Spain.
Shinzō Abe resigned at the end of August on health grounds after eight years at the helm of the government, marking the longest premiership in Japanese history. The size of the intervention carried out testifies to the extraordinary nature of the measures adopted to counter the consequences of the pandemic, even if its spread, with a limited loss of human life, has been among the lowest so far experienced.
China, the United States, and Japan show three different models of public intervention that reflect the different ideological models underlying political behavior. However, united by the strong imprint and determination of nation states, despite the profoundly different political framework.
From Great Britain to Germany
The experiences of two major European countries - Great Britain and Germany - testify to different but equally significant examples. The British case is an example of oscillation in the interpretation of the problem and in the remedies to address it. Initially, we witnessing an underestimation that reflects the attitude of the neo-prime minister Boris Johnson: the pandemic has inevitable consequences and will sow victims among the most fragile subjects, as in the case of the elderly, but the virus will tend to run out of charge as people will have accumulated the necessary antibodies.
It is the prevailing analysis model in Sweden. But it is a belief severely tested by the fact that Johnson was suddenly infected by the coronavirus. Ironically, the prime minister required emergency hospitalization which revealed he had seriously compromised pulmonary function. It was a highly disruptive experience. Even a relatively young person (Boris is 57 years old and in good health) can therefore run a fatal risk.The unpleasant and dangerous experience made him radically change his mind. Faced with second-quarter data marking the worsening of the pandemic and the collapse of the economy, Johnson announced a direct public intervention of 170 billion pounds.
“Great Britain - writes the Financial Times - is starting to promote a deficit whose level was seen only during the two world wars. The government will spend at least 350 billion ... in an attempt to limit the economic damage deriving from the pandemic ... The difference between spending and income will reduce with the economic recovery which will lead to an increase in VAT and income taxes "(How best to shrink UK's post-coronavirus deficit (Editorial, 11-12 July 2020).
With the new line, the government announces large investments in public works, roads, bridges, railways, and in the poorest regions of the country. The sensational change of course amazes the more traditionalist part of the Conservative Party. The Labor Party is unarmed and, perhaps, should regret the self-harming ruthlessness with which it opposed the leadership of Jeremy Corbyn, the radical leftwing leader, until the party suffered a resounding defeat in the late autumn elections.
In Angela Merkel's Germany, nothing is left to chance. Public intervention immediately assumes a totally exceptional dimension in the German tradition. The federal government invests 130 billion with immediate effects in support of employment and businesses. However, the total public intervention charged to the budget reaches 284 billion (8.3 percent of national income) for expenses mainly foreseen for the current year with an extension of some of them in 2021.
(Bruegel “The fiscal response to the economic fallout from the coronavirus” 05 August 2020). The commitment is by far the highest in the European Union, substantially equivalent to that of the UK and, as a percentage of GDP, more than double that of Italy.
VAT is temporarily reduced from 19 to 16 percent. Part time work is widely adopted as an alternative to layoffs. Fifty billion are committed to the development of advanced technologies such as hydrogen energy and artificial intelligence. For Peter Altmaier, minister of the economy, Germany will be the "economic engine" that will free Europe and the world from the coronavirus crisis.
The emphasis is evident. But the forecasts of major research institutes generally agree. According to the IFO and the International Monetary Fund, the reduction in GDP at the end of 2020 will fluctuate between 5 and 6 percent - the lowest level among the advanced capitalist countries since Japan during the pandemic - and, at the end of 2021, national income will return to pre-crisis levels. The British and German experiences, albeit in different contexts, testify to the general assumption of responsibility by national politics.
The case of Italy and Spain
Italy and Spain are, like Great Britain, among the countries hardest hit by the crisis. In the first six months of 2020, national income fell by 18 percent in Italy and by 22 percent in Spain. Spain fears, in turn, a surge in unemployment of up to 25 percent in the most serious crisis of the post-Franco era. In Italy, the situation is no longer comforting. For Ignazio Visco, governor of the Bank of Italy, we are facing "the worst collapse in peacetime since the unification of Italy in 1861". (Economic growth and productivity: Italy and the role of knowledge, 4 September, 2020). The alarm could not be more startling and come from a more authoritative source.
The radical nature of the crisis alarms France where an old idea, cultivated in the past by Mitterand and Delors, re-emerges. The European Union, or at least the eurozone, should face the most serious crisis in its history by acquiring its own capital to promote investments of common interest at the European level. Emmanuel Macron tries to revive the idea. But the proposal has been always impracticable due to the firm opposition of Germany. Eurozone member states must abide by public budget deficit limits without relying on the Europeanization of national debt shares.
Also Germany is concerned about the difficulties created by the pandemic and, in particular, for the future of Italy and Spain which are particularly affected by it. Their crisis would jeopardize the very existence of the eurozone. An intervention aimed at curbing the crisis that is dangerously affecting the eurozone and, in particular, the two most important countries after Germany and France itself, is considered unavoidable.
The chancellor, who is approaching the end of her fourth term, equaling Kohl's leadership, puts forward a proposal that France could hardly refuse. In addition to the 250 billion in aid already proposed by the European Commission, the European Union will raise another 500 billion on the financial markets to be distributed among the twenty-seven countries of the Union in relation to the severity of the crisis. Unlike the French proposal, this project does not involve an institutional change. It is, in fact, an exceptional, one-off measure, which does not involve the EU in the debts of the member states.
Under the pressure of the Netherlands, which leads the so-called "frugals", the relationship between the resources to be deployed is changed: 390 billion will be assigned as grants and 360 as loans. The loans will obviously remain the responsibility of the beneficiary states. The resources dedicated to grants which the European Commission is responsible for, will be reimbursed to the creditor banks on the basis of new Community revenues deriving by new kinds of taxes.
The proposal reveals the undoubted genius of Angela Merkel. The EU countries remain, in part individually and in part collectively, responsible for the repayment of the debt of 750 billion contracted by the European Commission. Germany confirms its central role in the choices of the Union without having to charge itself of the debts for which the member states, individually or collectively, will be responsible. In short, the coronavirus cannot become an opportunity to change the structure of the European Union.
The amount of resources mobilized is not comparable with those deployed in the countries we have mentioned. A total of 209 billion euro will be assigned to Italy, which will be the largest beneficiary. For a comparison, we must remember that Japan, with a population roughly double, has foreseen an intervention of 1 trillion dollars, equivalent to over 400 billion euro for Italy. And in the United States, the Democrats have got in the House of Representatives - but not in the Senate - the doubling of the expenditure that would amount to almost 30 percent of national income.
The quantitative gap is significant, but it is not the main point. The difference between all the interventions we have mentioned and the one planned in Italy and Spain is radical from a different point of view. Everywhere, in fact, public intervention has an immediate impact, aimed at resolving the economic crisis, linked to the pandemic, between 2020 and 2021. The intervention envisaged by the European Commission will come into play almost entirely between 2022 and 2027, provided that it fulfills the stringent conditions foreseen. But, this plan will have nothing to do with the current impact of the pandemic, which has already blocked the economy and threatened masses of new unemployed. According to the European Council, the interventions at national level should correspond to the "country-specific recommendations and contribute to the green and digital transition ... The plans will be reviewed in 2022 ... The legal commitments ... must be contracted by 31 December 2023. The related payments will be made. by 31 December 2026 " (European Council, 17-21 July 2020).
We have seen in all the countries involved in the consequences of the pandemic - from China, to Japan and to the United States - a programming of interventions immediately operational or, at the latest, 2021. It is clear that the intervention envisaged by the EU authorities has nothing to do with the immediate and shocking economic and social effects of the pandemic. To the ineffectiveness stringent and arbitrary conditions are added. With the alibi of the conditions that accompany those of resources, the European authorities should take over the direction of the national decisions in the investments mired to confront the economic consequences of the pandemic.
It is not surprising that Confindustria - the entrepreneurs’ association - is enthusiastic. The resources possibly authorized by the European authorities will basically be medium and long-term investments proposed by the enterprises in the framework of the Europe prescriptions - resources that in any case could be finding out on the financial markets.
We have seen that in all advanced countries - from China to the United State, to Japan, and so on - immediate investments are financed by fiscal resources or loans that the states take out with the banking system. In Italy it would not pose problems, given that over 1600 billion euro are deposited in banks and other financial institutions, half of which get interest rates close to zero, if not negative.
In effect, Italy and Spain have the highest savings shares in Europe. Like all the states we have mentioned, they could draw on loans to be used for public investment and to support private ones to accelerate the recovery of the economy. The public debt corresponds to a share of the national income, and may be reduced over the years in parallel with the increase of national income. It is, indeed, the only way to reduce the debt, since, without a sustained growth in national income, the debt will continue to increase due to the interest payments - just, as it has happened in Italy and Spain in the last decade.
Obviously, in all countries, hit by the pandemic that has reduced tax revenues and increased public spending, public debt has sharply risen. In the United States it reached the highest level after the end of the Second World War. French public debt with over 120 per cent of GDP exceeds that of Spain. Japan, with the interventions of Shinzo Abe that we have mentioned, will mark a public debt of around 260 per cent of GDP in the current year. It is in this context that the public debt is increasing in Italy from 135 in 2019 to 160 percent of GDP in 2020.
And for those who consider it very high, there is no other solution than to aim for the fastest and most sustained recovery of growth possible, promoting extraordinary and huge public investments in infrastructures, in the poorest regions, in the educational and health care institutions, and so on. It is, as we have seen, the policy, with different accents, generally adopted, in the countries hit by the crisis.
The attitude of the Bank of Italy
We have seen that Italy comes from a period in which low growth and recession were intertwined. The problem, says Visco, governor of the Bank of Italy, is the "slow GDP growth that we have observed over the last 30 years ... The reason for this huge jump of about 30 years back in the past is twofold. The first is, of course, the striking extent of the collapse of the economy due to the pandemic. The second reason why we went so far back in the past is that, since the 1990s, Italy's GDP growth has been extremely weak ". Yet this second argument deserves a distinction which the governor omits.
In the nineties, after the devaluation of the lira in the autumn of 1992 under the Amato government - devaluation that was accompanied by that of the pound and other European currencies - a fall in GDP occurred in Italy as in many other countries of the European Union in 1993. After the brief recession of 1993, Italy went through a phase of slow but continuous growth, which lasted until 2001, marking an overall growth in national income of about 14 percent. The governor's claim that the collapse of national income dates back to the 1990s is therefore unmotivated and misleading. Coming from departments that have the most qualified analytical skills available in the country; risks generating serious and artificial elements of distortion in the evaluation of the country's economic margins.
The dramatic and radical change in many ways actually took place in the nearly twenty years after the advent of the euro. With the entry of the euro in 2002, the scenario has undergone radical changes, intertwined, initially with relatively low growth; then with a melancholy intertwining recession and stagnation interspersed with short periods of recovery.
In 2019 (even before the coronavirus manifested its devastating attack), national income was stuck at the value of the beginning of the century, after falling by five percent in the last decade after the crisis of 2008-2009. In this context, with the drastic fall in income, the national debt makes a leap forward, going from 103 per cent of GDP in 2007 to 135 per cent in 2019.
The Eurozone's perspective
However, Italy does not represent an exceptional situation. The eurozone as a whole is the area with the lowest growth and the highest average unemployment levels within the advanced capitalist countries. As the eurozone oscillated between recession, stagnation and low growth, the United States was experiencing the longest period of growth in its history.
At the same time, the center of the world economy shifted from the Mediterranean to the shores of the Pacific under the rule of the United States and China, now the two main global economic powers, followed by Japan. In Europe the domination of Germany has been affirmed, which, despite an overall modest growth, was able to take advantage of an unparalleled trade surplus.
This theme will be developed in greater detail and motivation by economic historians. But it is worth returning to the near future and its hardly comforting prospects. The failure of the eurozone policy that has affected some countries and, in particular, Italy cannot be overshadowed. A realistic assessment of past events should make us more vigilant about the future that lies ahead to interrupt the worst economic cycle in national history. The direction taken goes, unfortunately, in the opposite direction.
In a recent speech Daniele Franco, general manager of the Bank of Italy, outlined the possible developments of the national economy. Having stated, according to the report of the intervention reported by "24 Ore", that "the worsening of demand prospects and business confidence will affect investments. And this is perhaps the heaviest legacy that we will face in the coming years”. He observed that the national economic drop will be only partially recovered over the next two years with an increase in income of 4.8 percent in 2021and 2.4 per cent in 2022 (Bank of Italy does not see a "V-shaped recovery" for the 'Italian economy, Il Sole-24 ore, 23 July 2020 ").
In other words, the return to income in 2019 can reasonably be expected around 2024. Beyond the arid count of the years, national income in real terms will still be around 5 per cent lower than it was before the Great Recession of 2009-2011. Italy is thus becoming the most excellent sacrificial victim of the policy decided by the European Commission in combination with the representatives of the twenty-seven member states of the EU. The consequences will weigh on the growing mass of unemployed, precarious workers, as well as growing parts of the impoverished middle class.
Unfortunately, this is a process in which the two governments, Italian and Spanish, both founded on center-left coalitions, are involved. Governments which, by submitting themselves to the dictates of Brussels, risk leaving the field open to right-wing coalitions. As in a famous play by Edoardo, it is stated that "exams never end", so errors stubbornly repeat themselves in the context of European politics. To give up a solution that is adopted in all the countries affected by the worst crisis in a century is meaningless. But this is what lies ahead in Italy.
Will the Conte government hold up until the election of the new President of the Republic? It is possible, even if it is not certain. Should it fall, the rightwing majority in the current voting intentions is ready to take over the government of the country.
The future is, according to the ancient maxim, on the knees of the gods. Who, today, it seems that they live in Brussels, where the sacrifices are celebrated by priests endowed with abusive power. No government is condemned to conduct a ruinous policy for the country it is called to lead. The possibilities of getting out of the trap into which Italy has been lured exists, as the lesson of normal countries struggling with the coronavirus pandemic shows. But, unfortunately, there is no sign of this possible turning point so far.