- European economies will shrink and risk a prolonged decline unless governments plow cash into their economies to combat the fallout from the novel coronavirus, Mario Draghi said in a Financial Times column this week.
- “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,” the former European Central Bank president said.
- Draghi argued governments should compensate businesses that lose income or take on debt to weather the pandemic.
- Countries risk “permanently lower employment and capacity,” he said, unless they flood their economies with liquidity using bond markets, banks, and even post offices.
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The novel coronavirus will choke growth across Europe and could permanently shrink economies unless governments splash their cash, Mario Draghi, the former European Central Bank president, said in a Financial Times column this week.
“The coronavirus pandemic is a human tragedy of potentially biblical proportions,” Draghi said. Ongoing national lockdowns, intended to reduce transmission and prevent healthcare systems from being overwhelmed, come with “a huge and unavoidable economic cost,” he added.
Companies are laying off workers as they cut back or close, meaning “a deep recession is inevitable,” the ECB chief between 2011 and 2019 said. Governments can only work to minimise its magnitude and duration, he continued.
“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,” he added.
Draghi argued governments should take the hit for companies as they lose income and take on debt to stay afloat. Sharply higher public debt will become a “permanent feature of our economies,” he continued, adding that private-sector debts should be cancelled.
The former central-bank chief underscored the need for governments to prevent job losses, not just help the newly unemployed, or risk ” permanently lower employment and capacity” once companies downsize their operations. He called for authorities to flood their economies with liquidity using bond markets, banks, and even post offices.
“Banks must rapidly lend funds at zero cost to companies prepared to save jobs,” Draghi said. Given they would be acting as “a vehicle for public policy,” the government should guarantee all additional overdrafts or loans they make, he added.
Draghi’s comments come after his replacement, Christine Lagarde, unveiled a Pandemic Emergency Purchase Programme that centres on spending $US820 billion on public and private securities. “Extraordinary times require extraordinary action,” Lagarde said.