Economic impact from covid-19: What should be done to limit damage?
In this article released by the Financial Times, Mario Draghi reflects about the measures to be taken to limit the economic impacts of the coronavirus crisis.
The recession will happen but the depth and length of it will depend on the effectiveness of the actions taken by the governments: “The challenge we face is how to act with sufficient strength and speed to prevent the recession from morphing into a prolonged depression, made deeper by a plethora of defaults leaving irreversible damage”
Mario Draghi considers that the answer must involve a significant increase in public debt. “The key question is not whether but how the state should put its balance sheet to good use. Public debt levels will have increased but the alternative would be more damaging. Speed is absolutely essential for effectiveness, the cost of hesitation may be irreversible.”
He remarks the relevance of the financial systems of the countries as the mechanism to transmit to the real economy all the set of measures announced by the governments. In particular he makes specific references to the banks which should count with state guarantees and all the flexibility necessary by authorities, regulators and supervisors to deal with this aim: “Banks must rapidly lend funds at zero cost to companies prepared to save jobs. Since in this way they are becoming a vehicle for public policy, the capital they need to perform this task must be provided by the government in the form of state guarantees on all additional overdrafts or loans. Neither regulation nor collateral rules should stand in the way of creating all the space needed in bank balance sheets for this purpose”