Sylvie Goulard, Deputy Governor of the Banque de France and former Minister of the Armed Forces, was invited by the Monegasque Association of Financial Activities to a luncheon conferenc.
The impact of Coronavirus on the economy
The economic and financial environment changes from day to day. The Coronavirus is a phenomenon without equivalent and unprecedented in history.
The virus is spreading because our globalized economy is characterized by a lack of "sustainability", increased interdependencies and inequalities, among others concerning health systems. There is also great volatility, not only in the markets, but also in the rather emotional behaviour of our societies, encouraged by new means of communication that favour immediacy.
Unfortunately, we are therefore at a time when multilateral frameworks, rules and multinational institutions are being challenged at a time when we are going to need a burst of cooperation.
Coronavirus is obviously a challenge for elected authorities, but it also affects central banks and supervisors, as evidenced by the turmoil in the markets.
In the short term, the overriding issue is health. In the longer term, the fundamental question is: will this epidemic lead to structural changes? Will we see, for example, a change in modes of production, with the relocation of companies, international value chains and interdependencies being called into question? At this stage, it is impossible to say. But we can ask the question: how can we make the global economy more sustainable?
Global economy and growth.
For 2020, economists anticipated at the very beginning of the year a world growth of about 3%, with an impression of stabilization or even a slight improvement. The OECD reduced its forecast to 2.4% last week, on the condition that the Coronavirus remains contained and not too virulent. According to the Chinese authorities, the country's situation is now more or less under control. As far as Italy is concerned, where Lombardy accounts for 22% of Italy's GDP and Veneto for 10%, one can imagine what the quarantine measures will mean for the country, not to mention other possible contagions.
For economists there is today a negative and unanticipated shock of demand.
The shutting down of entire regions leads to a drop in consumption by businesses and services. Tourism is practically frozen, as is air transport. These sectors alone can have enormous repercussions because China accounts for 17% of world tourism, and for Italy the sector accounts for more than 10% of GDP. There is also an impact on the price of raw materials, of energy sources. The price of oil has fallen by 30%, as the Saudis have unilaterally decided to increase their production.
This shock is particularly significant because China is one of the largest consumers of raw materials and energy.
At the same time, there is a negative and unanticipated supply shock: Peugeot factories, for example, are almost at a standstill.
The uncertainty shock is the most difficult to measure. It relates to the capacity of companies to invest. In any case, there is great volatility on the markets: in the United States, equities have lost more than 10%. Let's not forget that in 2003, during the SARS era, China accounted for 6% of world imports and exports, today it is 10%.
Any solutions?
The World Situation
Most countries show their willingness to act in a concerted manner, but political systems and societies are different, as are the mandates of certain institutions. Ms Lagarde announced that the ECB's responses to the crisis would be proportionate and targeted, but the ECB, unlike the Fed which is supposed to ensure low inflation and unemployment, has a narrow mandate focused on price stability.
We are already in a context of accommodative monetary policy; interest rates are very low, even negative. The balance sheets of central banks have already been considerably increased, the budgetary policies of some countries are not very far-sighted: 100% debt for France, 130% for Italy...the budgetary room for manoeuvre for these countries is therefore small, especially when compared to Germany or the Netherlands, for example.
With debt ratios of over 300% in relation to world GDP, and countries with a wide range of debt levels, will we be adding liquidity in this crisis context?
It is also important to remember that global trade tensions have not yet been resolved: the United States and China have reached an agreement, the "Phase One deal", which for the future seems likely to ease the situation, but without going back on the increases in customs duties already introduced between the two countries. This will inevitably have an indirect impact on Europe. Moreover, since multilateralism is not extremely brave, we were in a tense context, we are now in a crisis environment.
Europe
In Europe, economic growth was starting up again more moderately but seemed to be improving.
However, the political situation is fragile: almost all European Union countries are experiencing great political fragmentation (this is the case in Italy, the Netherlands, Spain, Germany and Belgium, to name but a few); few heads of government can count on a clear and determined majority. The ideological volatility is striking.
Furthermore, at the last European Council, the European Heads of State and Government did not agree on the financial perspectives of the European Union, which should be adopted at the end of February. For the time being, therefore, we do not have a budget for the next seven years. Everyone knows that the method is wrong; it consists of conducting negotiations unanimously, without sufficient renewal of policies and for too long a time.
On the positive side, since the last crisis, the banking sector is much stronger and the supervisory mechanisms are more effective. Banks have access to liquidity at a lower cost. But economic and monetary union would benefit from being complemented by measures to encourage the union of capital markets.
This overview would not be complete without saying a word about the UK's exit from the EU, the "Brexit."
The implications should not be minimized. This is the first departure of a Member State of the European Union. In 2016, when the British voted 52% in favour of withdrawal from the European Union, it has never been specified on what basis: an exit maintaining close ties and regulatory proximity (as with Norway, for example) or a more radical move away, where relations are essentially commercial? The government of Boris Johnson has chosen an extremely radical position, a "hard-brexit" giving the UK complete independence in its legislative choices, at the risk of seriously diverging. This choice is not insignificant.
If we can get the impression that the Brexit is inconsequential, it is because we are still in a period of transition, maintaining the status quo. The United Kingdom did indeed leave the EU and its institutions, legally, on 31 January, but it has until 31 December to negotiate an agreement on the future relationship.
The British wanted to regain control of their destiny and they have done so. Nevertheless the effect of uncertainty on Brexit has already had an impact, investment in the UK has fallen by around 11% since 2016, productivity has fallen, and announcements on restricting emigration are creating labour tensions, particularly in the unskilled sectors. On the European side, we are keen to reach an agreement that would bring standards closer to everyone.
In relation to the epidemic, the subject may seem minor, but it will have an impact both on our relation.
