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It seems increasingly clear that the pandemic crisis we are experiencing will have devastating effects, not only on public health and the loss of precious human lives, but also on the economic level. It seems we are on the verge of a global recession.


The impact of COVID-19 in Portugal cannot yet be quantified. Much is dependent on the duration of the epidemic and how it will affect productive activity not only in Portugal, but also in other countries with which we have strong economic relations. For now, the news are not good: a recession is expected in the euro area and in its main economies – Germany, Italy, France and Spain. On the other hand, the other major economies in the world will be seriously affected, like China and the United States.


In Portugal, in the short term, the most serious economic and social problem will be unemployment, coupled with the disruption of production and the decline in economic activity.


This short-term concern is joined in the long-term by the impact on the growth potential of the Portuguese economy. Although  this  'war'  – as it is already called – unlike the real wars does not involve destruction of physical capital (namely infrastructures), and not being so lethal to the younger generations that comprise the working population, it can nevertheless have a corrosive effect on the growth potential. This is because, by affecting both demand and supply, in the absence of strong economic policy measures that counteract these effects, it could lead to the disappearance of many viable companies, to a strong decapitalisation of many others,  to the loss of human capital,  that is,  it could significantly undermine the future production capacity of the Portuguese economy. It is therefore important to maintain the viability of the activity in the various sectors, to ensure that many production units, in the most diverse sectors, do not simply disappear.


The financial sector also deserves special concern. It is important to ensure that it can continue to work as a vehicle to support the functioning of the economy (through its credit policy), which requires not only to ensure its access to liquidity, but also the maintenance of adequate levels of financial strength. The risk of increased credit defaults by households and businesses should be carefully monitored. The moratoriums already given by some banks are an important measure for debtors (even from a social point of view) and it is an attempt to prevent the precipitating of such default situations, further affecting banks' balance sheets. The lessons of the 2008 financial crisis cannot be forgotten. The temporary softening, authorised by the European Central Bank (ECB) in response to COVID-19, of the equity ratios resulting from Basel III cannot imply a lack of monitoring and protection of the financial sector situation in the near future.


Being a spurious crisis which is in not due to the budgetary prodigality of the States or any other macroeconomic imbalance, but rather a common shock to all countries (and not an idiosyncratic shock), a coordinated action by the European institutions and politicians is now required. As in many fights, there are two fronts: the monetary front and the budgetary front. It will probably be necessary to use heterodox measures in both.


On the monetary policy side, the ECB's recent announcement of the pandemic emergency asset purchase programme (PEPP) had an immediate favourable effect, ensuring the momentary calm of markets, especially the debt market, where peripheral countries' interest rates (including Portugal) had already begun to increase.


On the fiscal policy side, the response to the common shock requires joint funding by recovering the eurobonds model, now called "corona bonds" or any other name. It is a matter of opening the door, albeit momentarily, to the joint issuance by European countries or the euro zone of public debt, ensuring the necessary risk sharing thus preventing that the increase in indebtedness associated with pandemic induced spending (direct and indirect) results into increased national risk premiums or to the loss of access to finance in the worst-affected economies. That is ultimately preventing a new sovereign debt crisis that would increase the already high costs and suffering of the population. The Portuguese Public Finance Council is currently proposing to the other independent budgetary institutions (IFI) a common position to warn of the need to move towards joint debt issuance at Union or euro area level. This position is based on the fact that it is imperative to protect families, businesses and economic activity from the destructive effects of the pandemic, and in this context the fears of moral hazard that prevented the use of this instrument in the previous crisis do not apply. In isolation, each country may not have the full capacity to meet this gigantic challenge. Europe as a whole, however, is a great power that must become aware of being so and act accordingly, mobilising all the resources that are necessary to protect its population giving us all  an horizon of hope.


There is no lack of proposals and there is technical capacity to implement them. It will depend entirely on political action. It is in the hands of European leaders to undertake a concerted action that supports that horizon of hope, preserving the European Union as an economic and monetary project and, above all, as a political project.




Public interventions . 23 March 2020