EU rundown, US meltdown, climate lockdown
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EU rundown, US meltdown, climate lockdown


This week in Keeping Tabs: what explains the relative performance of different EU countries and what does this mean for fiscal and monetary policy; why you should brace for US election chaos; and how to harness finance for green purposes.

Why have some EU economies struggled more than others in the pandemic? André Sapir takes a look in a paper for think-tank Bruegel.

Unsurprisingly, the severity of lockdown measures, the importance of tourism to the economy and the quality of governance are important factors, explaining nearly 60% of the difference in the economic hit.

To be precise, Sapir says that "depending on the pairs of countries or country groupings that we compared, we found that differences in GDP losses were between 30% and 50% down to lockdown strictness, between 35% and 45% to the quality of governance and between 15% and 25% down to tourism".

Based on the difference between February and July GDP forecasts from the European Commission, the five worst hit countries have been Croatia, Spain, Ireland, France and Italy in that order. The five least-affected countries have been Sweden, Denmark, Germany, Finland and Poland, in that order.

The Netherlands and Austria were sixth and seventh least affected. These two, Sweden and Denmark make up the "frugal four" countries that were most resistant to a generous EU recovery fund.

One measure that is insignificant to how bad the economic hit has been, however, is the level of public debt going into the crisis. Sapir says that this suggests the European Central Bank’s Pandemic Emergency Purchase Programme has worked, "in countering the risk that high public debt euro-area countries would be cut off from the market if they attempted to expand their debt issuance to respond to the Covid-19 crisis".

Meanwhile, is there anything countries should do about the factors that did matter? Sapir says we should look at quality of governance.

This is of course a subjective measure. Sapir's analysis is based on scores for the six parts of the World Bank Worldwide Governance indicator. These are: voice and accountability; political stability and absence of violence; government effectiveness; regulatory quality; rule of law; and control of corruption. 

On a side note, Keeping Tabs showed a few weeks ago how similar indicators predict the depth of an EU country's capital markets.

Sapir said the importance of governance in determining economic impact "should be taken into account when designing and evaluating the RRF [recovery and resilience facility] programmes that EU countries must submit to the European Commission for approval".

He said that programmes should "devote sufficient attention (and resources) to improving the quality of governance" in countries where poor governance has hindered resilience.

Meanwhile, The Atlantic has published a terrifying piece from Barton Gellman on the aftermath of the US presidential election on November 3. It is a long essay, but if for some reason you want to be scared into staying awake late into the night, it should do the trick.

It has been widely suggested that the US risks a contested result. Gellman says there is no way the incumbent, Donald Trump, will concede, and talks through what could happen.

"The worst case… is not that Trump rejects the election outcome," he says. "The worst case is that he uses his power to prevent a decisive outcome against him. If Trump sheds all restraint, and if his Republican allies play the parts he assigns them, he could obstruct the emergence of a legally unambiguous victory for Biden in the electoral college and then in Congress. He could prevent the formation of consensus about whether there is any outcome at all. He could seize on that un­certainty to hold on to power."

Options that Republicans and Trump supporters may pursue, as described by Gellman, include trying to suppress the Democratic vote through intimidation at voting stations and disqualification of votes. Meanwhile, given the demographics of the people whose vote will be added to the count after the night of the election, it is quite likely that a Trump lead on November 3 will sink in the days after the vote. This will give the Republicans ample opportunity for to sow doubt and conspiracy theories about the outcome.

Politicians, lawyers and judges may play starring roles, but the upshot is that it is far from clear how certain types of impasse will be broken.

Finally, if you needed more bad news, imagine a "climate lockdown". What would governments do if they decided decisive, urgent action was needed to save the planet?

They would "limit private vehicle use, ban consumption of red meat, and impose extreme energy saving measures, while fossil fuel companies would have to stop drilling", according to economist Mariana Mazzucato, writing for Project Syndicate.

The idea of lockdown is a neat coronavirus-related framing for a scenario that others have called a "Minsky moment".

So how to avoid getting to a position where that becomes necessary?

Well, one solution Mazzucato gives is to attach "strict conditions" to corporate support schemes, which may not be going away any time soon. She focuses more on government support, but of course there is also support from central banks.

On this note, it was interesting to hear Sarah Breeden of the Bank of England say on Thursday that her organisation is considering applying a condition like climate-related disclosure on eligibility for its corporate bond purchase programme.

This follows the European Central Bank this week saying it would embrace sustainability-linked bonds (SLBs) as collateral and for its asset purchase programme. These are small steps, but a signal of much greater moves to come, GlobalCapital argues.

On the subject of finance, Mazzucato writes: "The current crisis presents an opportunity to harness finance in productive ways to drive long-term growth. Patient long-term finance is key, because a three to five year investment cycle doesn’t match the long lifespan of a wind turbine (more than 25 years), or encourage the innovation needed in e-mobility, natural capital development (such as rewilding programs), and green infrastructure."

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