The Spanish economy in times of pandemic

Summary:

On 25 June 2020, the Rafael del Pino Foundation organised a dialogue entitled "The Spanish economy in times of pandemic" on the occasion of the publication of the book of the same title, published by Debate. Ángel de la Fuente, Juan Francisco Jimeno, Rafael Domenech, Luis Garicano, Jorge Galindo, Francisco Beltrán, Cristina Borra, Florentino Felgueroso, Libertad González, Ismael Sanz, Antonio García-Pascual and Antonia Díaz took part in the event.

Jorge Galindo, Director of Political Economy at EsadeEcPol commented that this virus is new. Hence the uncertainty surrounding everything that involves knowing why it is affecting us so much. COVID is a perfect balance between lethality and contagiousness. If it were like SARS, it would have a harder time infecting others because it would be too aggressive towards its host. If it were like influenza, it would not have a major consequence. 1% of those infected end up dying and a somewhat higher percentage end up in the ICU. With SARS, the fatality rate was 10%.

COVID is more easily spread, which can lead to the collapse of the hospital system. This is the central health challenge posed by the virus. In addition, 94% of the population remains susceptible to the virus. The virus spreads rapidly. On average, one person can infect three others, twice as many as with normal influenza. Containment measures have managed to reduce that number to less than one. What we don't know is whether the new precautions will be enough when we come out of confinement.

This situation can be addressed with tools to combat the severity of the virus, but this does not reduce the ability to infect. The remaining 94% of the population that remains to be infected must be prevented from contracting the virus. Preventing the concentration of people is very important to stop the spread of the virus. Therefore, we have to take measures with this type of events and, if they happen, act as quickly as possible, anticipating the virus, knowing in which places, for which people and job profiles contagion is more likely, tracing the contacts of these people and isolating them. The aim is to avoid a second peak of contagion.

Until when? The vaccine is the answer to that until when, if it works, if it is produced and distributed effectively. It takes time to have it, to set up the factories to produce it, and so on. The vaccine helps build immunity. Until then, we have to continue the task of measuring, tracking, isolating. Continue with social distance measures that have the least disruption to people's lives. And we will have to build medical and hospital capacity for when contagions occur.

Francisco Beltrán, associate professor at the Norwegian University of Science and Technology, said that the Spanish flu of 1918 is the best pandemic that can be compared to the current situation. It was a brutal episode. It infected almost a third of the world's population and more than fifty million people died. Although more than a hundred years have passed, the processes of spread of COVID are following very similar patterns. They follow interactions between people, population movements, and the virus follows those paths. The spread was global and very uneven, not least because of the measures to contain the extent of the disease, such as public hygiene measures like school closures and quarantines, etc.

Most worrying are the three waves of influenza in 1918. It started in the spring, was quiet in the summer and came back with much more mortality in the autumn. This makes us question the consequences of a reopening of the economy ahead of schedule.

The pace and duration of these waves was shaped by patterns of displacement and whether or not social distance measures were in place. It is a type of measure that, if populations are able to carry it out over a long period of time, the impact on lives is less, but the economic impact is greater. The cost of measures to close the economy is very high and we wonder whether it justifies such closures. There are few studies that have analysed this issue rigorously. Those that do exist suggest that there is no such trade-off. Closing the economy saves lives and has a positive long-term economic impact because it accelerates subsequent recovery.

Another lesson from the Spanish flu is the impact on the internal level of society itself, where there are also unequal impacts. The 1918 flu had a greater impact on lower income groups. The impact was also unequal by gender and race. This is repeating itself now, so we should pay attention to it and tackle it.

Cristina Borra, professor of Microeconomics and Labour Economics at the University of Seville, stressed that all countries have imposed social isolation measures, before or after, although at different times during the spread of the virus. There is a very strong correlation between how the regions were with respect to the spread of the virus when the state of alert was decreed and mortality. The more it had spread in a region, the higher the mortality has been.

Acting one day earlier could have prevented 10% of COVID deaths in Spain. This result implies that, if Madrid had acted six days earlier, 77 deaths per day in the community could have been avoided. This is a 40% reduction in mortality in that peak period of confinement.

Most regional governments talked about trying to flatten the infection curve to avoid the collapse of the health system. The key mechanism has been to reduce the number of infections, rather than allowing health systems to function. Confinement has been what has reduced infections.
If there is a recipe, it is that when it comes to a pandemic it is crucial to act fast. Many
Sometimes it means acting a day early because in a pandemic, time is of the essence.

Rafael Domenech, Head of Economic Analysis for Spain at BBVA and Professor of Economics at the University of Valencia, indicated that the epidemic generates five types of disturbances: those that affect the use of productive factors; those that affect household confidence, which reduce demand, and business confidence, which depress investment; those that affect house purchases; those that affect international trade, because exports fall worldwide; and, finally, those that affect potential defaults in the banking sector.

We assume that there will be no vaccine before 2021, which implies that normality means that the disturbances will not disappear before the end of the year.

The combined effect of the measures that have been taken is very significant. With them in place, the fall in GDP is reduced by 3.6 percentage points, bringing it down by 10.5. They also moderate the fall in private consumption and private investment. The other side of the coin is the increase in the public deficit by more than 3.5 percentage points. This brings the deficit to more than 12 GDP points and the debt-to-GDP ratio to close to 120%.

In an extraordinary crisis, all available economic policy tools must be used to maintain economic activity. We are facing a war against the coronavirus and we must mobilise accordingly, which requires the use of all tools. The better they are designed and the more quickly and effectively they are implemented, the greater the impact.

Florentino Felgueroso, associate researcher at FEDEA, referred to the need to have indicators and data adapted to the circumstances of this crisis, because it is not like the others. In the first phase there was a closure of sectors; in the second phase there is deconfinement, with space restrictions that imply an unknown supply limitation.

It is very important to monitor the crisis in terms of job creation and job destruction in order to know what action to take. The state of alarm coincides with the best moment of the Spanish economy. In these two months of last year there were 1.7 million people who found jobs and one million who were not entitled to benefits. That has not happened now. It was also the time to establish a minimum living income.

The impact of the crisis has been reflected in the record level of job seekers reached in May, with 8.5 million job seekers. In the first phase, many people were laid off or their contracts were not renewed. The second impact has been the ERTEs, because we reached the end of April with 3.4 million employees covered by them. Since then, some workers have been reinstated, but the most important part has yet to be reinstated. The third phenomenon is the fall in hiring. There have been 40% fewer hires than last year and the same volume as in 2007.

What comes next is to see what is going to happen with demand, with changes in income, consumer behaviour, fear of the virus.

Libertad González, professor of economics at Pompeu Fabra University, said that the current crisis is very different from previous ones, firstly because of how it has affected different sectors of the economy. The previous one affected very male-dominated sectors, such as industry and construction, and this one has affected more female-dominated sectors such as the hotel and catering industry and commerce. This makes us fear a greater impact on female employment.

The impact also varies depending on the extent to which a job can be done remotely or not. A third aspect is that, since the declaration of the state of emergency, the closure of schools has led to children staying at home and to an increase in the volume of household chores. This non-additional paid work led us to fear that it would fall disproportionately on women.

During April, 23% out of 7,000 surveyed by the professor and her team had lost their jobs. The loss was fairly even between men and women, while it was 15% among university graduates and 30% among workers without a university education. Men have increased their participation in household chores, but it has been small except for going out shopping, which was the only output that could be done during confinement. Most of the workload in the household has fallen on women. In the case of single mothers this can make it difficult to return to work.
Some sectors are being reactivated very quickly and others will take longer, including tourism and commerce, which are more feminised. Add to this the difficulties in reconciling work and family life while schools are closed, and in the medium term there will be unequal effects in terms of gender.

Ismael Sanz, professor of applied economics at the Universidad Rey Juan Carlos, said that the effect of school closures on student learning will not be very high due to the effort made by teachers to move from face-to-face to online teaching. The effect will be concentrated on students from the most disadvantaged backgrounds. The conclusion is that inequalities will increase.

The closure will have a negative impact of 6% on standard education, which is the difference between Spain and the OECD. The impact will be, above all, on pupils who have difficulty accessing digital resources and computers, with connectivity difficulties. Parents cannot help in the same way as in the case of better-off children due to lack of time and parents' own cognitive skills, which are not sufficient to provide their children with the necessary educational support.
Attempts can be made to cushion the impact of school closures through programmes such as PROA, which supports pupils who are lagging behind, and to provide these four additional hours of teaching support per week. While the programme was in place, it improved student outcomes. The programme to reduce school dropout, which operated until 2012, could also be revived, because it is more difficult for pupils who drop out of the education system to return.

There is a very concentrated effect on very disadvantaged and lagging pupils. This loss will be accentuated with the arrival of summer. That is why these programmes, which focus on tutoring small groups of pupils who are lagging behind, need to be resumed.

Antonia Díaz, professor of economics at the Carlos III University of Madrid, warned that COVID is a very low probability event, which makes it difficult to understand what will happen later on. What needs to be done to prevent contagion is what leads to an economic crisis. It is a spectacular supply and demand shock, especially in Spain because of the type of specialisation we have.

It is a sudden crisis due to the coordination in unemployment of the real activity. Financial activity, however, continues with the payments of bills, mortgages and loans. This conjunction is what has led us to the problem we are in and it is what determines the type of policies that have been approved. Their nature has been determinant in deferring payments. Now comes the question of how to pay for these policies.

It is important to think about how long this crisis will last and how we transition to safe technologies until we have a vaccine.

Luis Garicano, MEP, vice-president of Renew Europe and member of the Center for Economic Policy Research, praised the European Union, noting that in recent months we have seen the EU turn from an economic pygmy into a giant with the measures taken. There were two lines of response. On the one hand, there was the ECB with its asset purchase programme, allowing states to maintain access to the markets so that they could borrow without fear of the vicious circle of rates and debt. A second intervention has been with three liquidity programmes to support national unemployment, with the removal of conditions for accessing EFSM loans and with a European Investment Bank programme to help businesses.
The third leg of the strategy involves a joint debt issuance by European institutions, something that was previously unthinkable. Now France and Germany say they want to do so, using this debt to finance an investment fund to solve real problems. This is because Europe is able to issue debt more cheaply, because member states are heavily indebted, and it is a symbolic way of saying that Europe counts and helps.

The idea is that Europe should not finance it with the usual member state resources. This is a bad way to finance it because it raises arguments about where the money is going to come from. There are three possibilities: when the time comes to pay back the money, the EU budget is cut, the states are forced to pay more to the EU or, finally, the EU finances itself with its own resources, with its own taxes. This allows areas in which Europe has comparative advantages to raise resources to do so, for example a digital levy. Also through the emissions trading system, which is European. Or with a contribution based on plastic.

Antonio García-Pascual, visiting scholar at Johns Hopkins University, said that uncertainty about the immune scenario is high. The impact on aggregate activity in a baseline scenario would be 15%. In high-touch sectors such as tourism and hospitality the impact is higher, also in collateral sectors such as transport or the financial system.

With activity close to 60%, the economic decline would be 3% per month. In an optimistic scenario growth is similar to what the government estimates and in the most pessimistic scenario the fall would be close to 19%.
The fiscal impact on deficits and debt, including aid to workers and companies and the automatic stabilisers, would lead to a budget imbalance of 13% and debt above 120% and rising further in the coming years. The Treasury's financing requirement this year will be above 30% of GDP.

To stabilise debt we should have a fiscal surplus of 0.4% of GDP. This is a big challenge for Spain.
The ECB's help is key because it has reduced the costs of financing the public sector and the private sector. Europe is also helping through other instruments such as the ESM, which can be financed cheaply and reduces countries' financing costs. They are key to helping Spain, as is the European recovery fund.
Ángel de la Fuente, executive director of FEDEA, spoke of three groups of policies to tackle the crisis: mechanisms for labour flexibility and wage income replacement, mechanisms to help companies and the self-employed, and aid for vulnerable groups. It was necessary to do the best we could to protect people and companies, to preserve the productive fabric and to avoid damage that could hinder recovery.

Now the objective is more complicated because we must have stimuli for the recovery of activity and for workers to move to the activities of the future, maintaining as many viable companies as possible.
The first measures were along the right lines, although with delays and insufficient revenues, for example, delays in the payment of ERTEs, or in the implementation of other aid. The minimum income has also been implemented slowly and, at the same time, too quickly because it was intended to be a permanent measure, and it has not turned out very well.

It is necessary to adapt these measures to the reactivation process, adapt the ERTEs, review the social contribution exemption schemes, adapt the workforce to the new situation, have active employment policies for the unemployed, adapt aid schemes for companies to the conditions of the sector.

Juan Francisco Jimeno, associate professor at the University of Alcalá, pointed out that there are many fronts open. In the health field, controlling the pandemic and solving the problem is the priority. On the economic front, the labour market, public procurement, health and education are priorities. Economic policy should not increase uncertainty; if possible, it should reduce it. Secondly, we need to look for new solutions, new instruments, but this is not the time for big changes. It is about preventing the ship from sinking, not about making big changes.

We should anticipate where we want to go and bear in mind that we come from a complicated situation with worrying situations that were already there before the crisis. One is the labour market, with structural trends such as automation and new forms of employment and we are not being effective in dealing with those trends. The labour market has not been very efficient in reallocating employment to sectors with high productivity growth. A priority is to address the adaptation of the institutional context of the labour market with long-term trends in mind.

The second concern is public finances, the debt. In the short term there are not going to be difficulties. We have to worry about a macro stability programme that ensures medium and long term soundness. It requires in-depth fiscal reform, and a medium and long-term vision of what kind of country we want to be. The higher the debt and the longer we take to deal with it, the greater the risk that we will enter a new crisis.

The Rafael del Pino Foundation is not responsible for the comments, opinions or statements made by the people who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their sole responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio González, are the result of the debates held at the meeting held for this purpose at the Foundation and are the responsibility of the authors.

The Rafael del Pino Foundation is not responsible for any comments, opinions or statements made by third parties. In this respect, the FRP is not obliged to monitor the views expressed by such third parties who participate in its activities and which are expressed as a result of their inalienable right to freedom of expression and under their own responsibility. The contents included in the summary of this conference, written for the Rafael del Pino Foundation by Professor Emilio J. González, are the result of the discussions that took place during the conference organised for this purpose at the Foundation and are the sole responsibility of its authors.

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