Luigi Buttiglione: ‘EMU is at risk from coronavirus’

Luigi Buttiglione: ‘EMU is at risk from coronavirus’

Leading Italian economist Luigi Buttiglione recently spoke to Kathimerini about the public health crisis and the corresponding financial and economic crises. Following his tenure as senior economist at the Research Department of Banca d’Italia (1989-2000), he has achieved an impressive career in the global financial sector.

Among other positions, he has held that of senior economist at Deutsche Bank AG and head of European and Global Economics at Barclays Capital Securities Limited. Also he has taken up prominent positions at leading investment and asset management companies including BlueCrest Asset Management, Rubicon Fund Management, Fortress and Brevan Howard. Buttiglione is the founder of consultancy company LB-Macro.

Could Europe’s monetary union be at risk because of the coronavirus? If “whatever it takes” still applies, what measures should be taken this time, what would be enough to keep the euro steady? Would you support a policy of “helicopter money”?

Indeed the Economic and Monetary Union is at risk from the coronavirus due to the very steep extent of the recession ahead – well more pronounced than the 2009 crisis in my view – and the fragility of the EMU and EU institutional setup, where the ECB is de facto the only common game in town, and the lack of mutual fiscal help and bond issuance.

The monetary whatever-it-takes is a necessary but far from sufficient condition to keep the euro steady at a time when both GDP and public budgets are poised to contract at a double-digit pace. I would support both helicopter money – not least because it deals with inequality, unlike the current kind of QE – and large infrastructure spending programs. However, I think that they are both unlikely, the former even more than the latter, as they would be equivalent to fiscal transfers across countries, which is seen as a no-no by Nordic countries.

Would you support closer eurozone integration and a new Marshall Plan to sustain the European economy as a whole at this critical stage financed by a form of specially issued common bonds?

Of course, but we should not forget the nationality of George Marshall – he was American – and the views that he held, which were very different from the prevailing visions behind the current European project, which is so only in name.

What measures should be taken by governments and central banks to sustain confidence specifically in debt markets and to prevent an avalanche of bankruptcies of entire sectors that could cause disruptions in supplies of basic goods across the globe? More precisely, should central banks create money and governments act as “buyers of last resort” by financing state functions and supporting general economic demand?

The ECB should act as a central bank, and a central bank is indeed a lender of last resort, by definition. But the ECB does not behave that way, even after launching a larger QE program. Moreover, and importantly, the ECB is now being run by a president – Christine Lagarde – who has lost all credibility with financial markets and, even more importantly, with the European people. Draghi is only a memory, and it is clear to everybody that the latest 1-trillion-euro QE program was launched only thanks to the insistence of other ECB Board members who have made the central bank their profession rather than a social occasion. As we said before, massive, shared fiscal programs financed with money are the only way out in the presence of such a large economic shock and the inefficacy of other instruments.

Does the pandemic highlight the urgent necessity of global collaboration in the form of an urgent G20 convention as happened in 2008?

Certainly, yes, but as we can see, especially within Europe, collaboration is scant: Italy had to ask China for protective masks, as, at least initially, both Germany and France refused to provide any help and prevented exports of medical equipment.

What is your rough estimate of the duration of the crisis? Could the one-year duration of the 1918 Spanish flu be a plausible indicator?

No less than three months from today in its acute, “lockdown” phase, but the effects will be more long-lasting, despite misplaced hopes, more than forecasts of a V-shape recovery, envisaging a prompt recovery of all the output lost.

Is general lockdown a self-defeating and dangerous policy that might exacerbate the human cost because of the accelerating deterioration of debt sustainability across all state and private sectors leading to the dismantling of national economies? Could monetary and fiscal policy have any traction in a climate of global quarantine?

I think a lockdown is the only medicine, albeit very bitter, as shown by the Chinese experience. The deterioration of debt sustainability is an inevitable consequence, which is why a common monetary and fiscal policy response is a necessity.

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