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World Bank HQ, Washington DC (Inset: Coronavirus)
“FIGHTING COVID-19, Europe and Central Asia Update,” Conclusion*
Office of the Chief Economist
CC BY3.0 IGO
In February 2020, the coronavirus outbreak began wreaking havoc on the world economy and interrupted the incipient recovery that was underway in the Europe and Central Asia region earlier in the year. The impact of the coronavirus pandemic on growth in the region will depend on how the outbreak evolves. Although the magnitude of the impact is uncertain, the pandemic has already derailed the near-term outlook by interrupting daily activity, putting further downward pressure on commodity prices, disrupting tightly linked global and regional supply chains, reducing travel and tourism, and decreasing export demand.
Lessons from previous infectious disease outbreaks, as well as the experiences of the countries that were hit early by COVID-19, clearly show that severe containment measures, such as social distancing requirements, shutdowns of nonessential businesses and entertainment, and school closures, are important measures in saving lives by “flattening the curve” of infections and preventing health care systems from being overwhelmed. Policy makers face difficult trade-offs between the health benefits of these policies and their economic costs, however, since the more successful the containment policies are, and the flatter the infection curve is, the deeper the economic recession becomes.
During these difficult times, first, it is important for policy makers to act decisively in favor of saving lives, since the most fundamental function of a government is to keep its population safe. The challenge is to minimize the economic cost of this pandemic and ensure that the most vulnerable are protected and the recovery, once it begins, is quick rather than prolonged. Under these circumstances, the case for fiscal stimulus is overwhelming. Unfortunately, many countries in Europe and Central Asia already have rising debt levels and are ill-prepared to address this crisis. Buffers will have to be used, and spending will need to be carefully reprioritized to the most urgent needs.
The immediate policy priorities are bolstering health care systems to save lives, strengthening safety nets to provide relief to households, and providing support to the private sector to cushion the downturn and preserve jobs. To the extent fiscal space is available, broad-based fiscal stimulus can also help lift aggregate demand, but it will probably be more effective after the immediate crisis has passed and business operations begin to normalize.
Monetary policy can also play an important role. Central banks should be ready to provide ample liquidity to banks and nonbank financial institutions, particularly to small and medium-size enterprises, which are prone to suffer more from the sharp disruption. Broader monetary stimulus, such as policy rate cuts or asset purchases, can lift confidence and support financial markets to offset the risk of a sizable tightening in financial conditions, given the volatility in markets. International coordination in monetary easing could further alleviate the volatility. As in the case of fiscal support, the availability of buffers and monetary space varies across countries in the region.
On a more positive note, there may even be long-term benefits from the lifestyle changes brought on by the coronavirus pandemic. As firms require their workers to telecommute relying on computing and video technology, educators at nearly every level scramble to replace classroom instruction with online alternatives, and consumer shopping and banking turn to digital platforms, these are bound to generate innovation and productivity increases that remain long after the crisis has passed.
For now, though, these are challenging times for policy makers in the region. Fighting the pandemic will require fast and decisive policy action to save lives now, as well as preserve jobs and livelihoods over the next years.
*Bold type supplied
Featured image (collage): World Bank HQ/Carol M. Highsmith, PD; Coronavirus/Felipe Esquivel Reed via Wikipedia, CC BY-SA4.0, cropped. Frame supplied.
Coronavirus shutdown in Frankfurt/Photoheuristic.info, CC BY2.0
La Paz Hospital/M. Peinado, CC BY2.0
Telecommute/Mike McCune, CC BY2.0
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