Productive Debt vs. just in time for the summer

“La course à l'échalote” (or literally ‘the shallot race’ to label a futile competition) was allegedly used by the German Minister of Foreign Affairs to denounce some European countries’ race to hastily deconfine on time for the summer tourism season. The dilemma faced by all governments has been unbearable: the dilemma of maintaining economic activity risking massive loss of lives vs. curtailing the virus spread through lockdowns and social distancing at the expense of the economy to try to “flatten the curve”. Keynes, Marx and Schumpeter locked down together playing Rubik's cube.

However, this dilemma called for uncoordinated trade-offs, while the resumption of travel and trade will require coordination. After what seemed like a long period of denial, followed by the cacophony and an absence of global coordination (multilateralism?), we might face a patchwork of policies of hasted openings, gradual deconfinement, re-confinement if transmission coefficients are high, and painful drastic measures. In Europe, the challenge for the Union is twofold, but “calibrated sovereignty transfers can be justified with visible achievements”.

A quarter of denial during which economists could not bear modeling this triple crisis other than as a pandemic, a one-off event with limited lasting impact on productive capacity. GDP growth rates estimates will be revised downward, once the 2nd and 3rd effect (stemming from defaults and bankruptcies, mass layoffs, Non-performing loans, precautionary savings, negative demand shock, supply-side obstacles, lower consumer spending and delayed investment decisions, to name a few) are factored in.

From ‘so-so distancing’ (my son’s vocabulary improved), we learnt a few sobering lessons:

·      On emissions, even the most extreme demand-side response humanity could engineer (half of humanity under lockdown) might not be enough to reach the Paris Agreement targets.

·      On globalization, China has 3 times the manufacturing capacity of the next 13 emerging markets, reshoring will still present significant constraints in several parts of the supply chains.

·      On the role of governments, contact tracing applications raised serious privacy and data utilization concerns. In the absence of a vaccine, if the intensive R&D efforts underway can guarantee their efficacy, citizens might still prefer to be traced than to be sick. As Yuval Noah Harari wrote in ‘the world after coronavirus’, Financial Times, March 21, “This storm will pass, but the choices we make now could change our lives for years to come”

The globalized energy sector was not spared by the storm: record demand destruction, record inventory builds, negative front month prices, and an unclear trajectory of demand growth for oil, gas and by contrast electricity. The crisis led to sharp cuts in capital expenditures, hundreds of thousands of job losses, practical restrictions to projects and supply chains: Asian shipyards, specialized engineering from Lombardy, Italy. The first consequence is a possible restructuring of the oil and gas industry, accelerating closure of the lowest efficiency parts of the capital stock, producing assets and companies, and a wave of Mergers & Acquisitions in a sector where activity and returns to investors have been comparatively low over the last decade.

In parallel, a global liquidity crunch might be taking hold as more financial assets lose their value. Central banks and multilaterals are stepping up with large packages of debt relief and exploring to increase allocations of SDRs (2009, $1 trillion injected in global economy, including $250 billion of additional SDRs – the requirements are higher this time). Let’s learn from this unprecedented, compounded and globalized experience by creating productive debt and channeling #investments to sustainable productive capacity at the heart of our economic recovery plans, whether we deconfine on time for the summer or not.