SPECULUM VERUM
The economic consequences of the pandemic vary across the EU. Ultimately, however, the pandemic will leave behind a government-run economy and shattered public finances. To finance the debt, only one way remains.
The second wave of the pandemic is well underway in Europe. And as with the first wave, the EU states are affected differently economically. In southern Europe the economy is more dependent on services than in the north. Social distancing measures are hitting the economy there to the core.
In Germany, the manufacturing industry plays a larger role. Added, that, in contrast to the first wave, the German economy is less affected by the interruption of deliveries to and from China will suffer, since the epidemic there is largely under control. All in all, the economy in the euro area must expect another setback in the winter, but below the surface the development will probably show a k-shaped spread: Where manufacturing is important, the economy is more resilient, where it depends on services, she collapses strongly.
The k spread is also likely to determine the future course of public finances. The resurgence of the economic crisis in southern Europe will require even more government support, which in the end become even higher National debt will lead. Since increasing new debt on the market is ruled out due to the threat of an increase in interest rates, The European Central Bank must provide monetary financing by increasing its Corona bond purchase program PEPP. With PEPP, it can also print the money specifically for countries in particular need.
The legacy of the epidemic will be an economy largely controlled by governments, shattered state finances and an enormous surplus of money created to finance the national debt. The similarities to a war economy are obvious.
After the Napoleonic Wars, England was able to work its way out of its national debt with the Industrial Revolution, After the Second World War, the USA succeeded in doing this with a period triggered by reconstruction and catch-up consumption (and supported by negative real interest rates) Economic boom. A comparable growth driver for the period after the epidemic is not in sight for the euro zone. There is a threat of bankruptcy or inflation to eliminate the debt- and money surplus.
If the responsible politicians were capable, to think beyond the day, they would already consider a currency reform today, with which a significant part of the national debt is on the balance sheet of the ECB could be shut down. The digitalization of the euro would provide the opportunity for this. But a well thought-out solution would be a miracle. On the other hand, people would rather delay the impending bankruptcy than allow it.
The only likely solution that remains is inflation as a purgatory for burning debt. There are currently no signs of this. As a result, it will come as even more of a surprise to many economists and investors, who don't make it, derived from the dynamics of development, what could be lurking around the next corner.
Thomas Mayer is founding director of the Flossbach von Storch Research Institute and professor at the University of Witten/Herdecke