Bold moves by V4 governments may bring short-term relief to the virus-stricken economies but carry long-term risks if the COVID-19 pandemic persists.
At first, the coronavirus did not appear to be particularly deadly nor infectious. Also, it seemed that its influence on the economy should be negligible as most of the casualties were seniors.
This gave a false idea to some politicians that we should outwait the virus. The effect was complete paralysis of the healthcare system and, in turn, of the daily social life.
China and subsequently Italy and Spain suffered the consequences. More likely than not, the UK and the US are going to pay in a similar way for their negligence. They will have to enforce social distancing protocols.
Politicians were wary of shutting down society because of the great economic cost (and its political impact). However, the cost of the COVID-19 pandemic could be far greater.
Asian countries enforced strict lockdown protocol combined with mass testing and invigilation. This gave quite stunning results in response to the spread of the virus. Meanwhile, Europe had mostly been going for laxer means – hoping for the best and counting on the individual responsibility of citizens.
This strategy was not particularly effective. Among others, the Visegrad group countries were initially at a stage of denial – especially in Poland, where the Minister of Health dismissed the danger to public health as last as 5 March.
Yet, measures were introduced promptly at an early stage and they remain in place to this day. So far, the results appear to be promising, with a relatively slow spread of infection in the region. Nevertheless, it is too early to give any meaningful verdict. Because the spread of the first infections in the V4 countries occurred quite late, we are still in the early stage of the COVID-19 pandemic.
A set of shocks
The economic impact of the pandemic emerges from several directions. On the demand side, the quarantine measures caused a significant drop in demand for most product and service categories (apart from food and sanitation – especially toilet paper). Particularly, tourism and all services requiring the presence of personnel are badly hit.
On the other hand, the supply side suffers as well because of government decrees to close various locations such as schools, universities, restaurants and pubs, while putting a ban on public gatherings.
Problems also pose to supply chains. A break of operations in China puts a lot of factories there on stand-by, despite the larger than use stock the result of the Chinese New Year. This break will have repercussions down the logistics chain, causing additional shocks. The same thing goes for the break of operations in Italian factories.
In principle, we can expect a recession in most European countries during at least two quarters of the year 2020. And this remains a positive scenario, assuming the COVID-19 pandemic can be contained and will not return in the fall.
Small and open economies will the brunt of the economic slowdown. All of the V4 economies are very open because these countries built their economic success of the last decades on the participation in the international division of labour.
While most exposed countries are Czechia and Slovakia, it does not mean Poland and Hungary will not be badly hurt too. The biggest short-term problem is the liquidity of companies. With the economy partially shut down, many companies face bankruptcy within a month.
A scenario of widespread bankruptcy is one of the main threats to economic recovery – after the pandemic ceases. There will be no one to pick up the rise in demand and many chains of cooperation will be shattered.
Under the disguise of employee protection, governments respond by mainly tackling this problem. In Hungary, the repayment of loans was frozen until the end of the year and the maximum interest rate limited to the central bank’s base rate (currently 0,9 per cent). In Poland, the government negotiated with the banks a three-month moratorium.
Questions are raised about the stability of the financial sector under such severe stress. This is why central banks are intervening. In Poland and Czechia, central banks have slashed interest rates by half a per cent and are provide additional liquidity. Moreover, the Poland central bank has begun with mass purchases of government debt in order to finance current government spending, which might be a violation of the Polish constitution.
The help to ensure liquidity does not stop here. The Czech government decided to provide interest-free loans and guarantees. Other measures include the delay or the outright cancellation of certain public contributions, in the case of Poland (for companies that experienced a drop in revenues of 50 per cent or more compared to February), Czechia and Hungary.
Poland went even further, with the government subsiding 40 per cent of payroll expenses and allowing for a temporary 20 per cent payroll cut for eligible companies. Czechia is ready to subsidize up to 80 per cent of the payroll; it is also focusing its help on the self-employed, by cancelling their social contributions for the duration of the COVID-19 pandemic.
These are quite generous measures, which is understandable when taking the upcoming elections and relatively low level of state debt into consideration.
The absence of Slovakia in the context of the reaction to the crisis arises from the fact that its government is being formed at the moment. Also, as a member of the eurozone, the country does not have an independent monetary policy. Still, the Slovak government’s reaction may appear soon and will be similar to other V4 countries – a focus on the provision of liquidity to companies.
What is missing
The governments’ reaction seems both very bold and taxing for public finances. Yet, it appears they still fall short of the current needs. This is indicated by the constant adjustments and expansions to these programmes.
Despite the apparent boldness, most of the measures were immediately criticised as insufficient. However, these expansive measures are extremely costly and the liquidity problem of companies by soon be translated into a liquidity problem of the state – if tax receipts fall drastically and spending skyrockets.
Then, the state budget may be supported by the monetisation of debt. That is only a short-term solution that could bring about a burst of inflation.
If the COVID-19 pandemic ceases within a month or two, the V4 governments may manage to soften the blow of the virus on the economy. The losses are very real, but if the spread is evenly felt in a minor fashion among the population, then the whole mess might be forgotten as the economy jumps back into its old track.
However, if the crisis persists, then problems will compound. The liquidity provided now will not be sufficient in the long run. Companies would start to bankrupt in droves, hitting tax revenues and leading to an increase in unemployment. At the same time, the state budget would be empty and further monetisation might lead to hyperinflation.
If such a scenario materialises, it will be a crisis unseen in the region since the collapse of communism.