1. This presentation is based on a presentation first held March 24, 2020

“Whatever it takes”, Mario Draghi, the President of the European Central bank, stated in London, July 26, 2012. This was his response to the euro-crisis, and yes, his statement made a big difference. 

“Whatever it takes,” Angela Merkel stated March 11, 2020, commenting on actions needed to combat the economic impact of the corona crisis.

Hence, it’s about time to review the economic impact and possible mitigation measures. 

At this junction delivery on the promise to do “whatever it takes” should be understood literally. It may move us into a new era of economics. 

Into the era of the illusionary monetary system.

The stages of a financial crisis

Most economic crisis work their way through multiple stages, as illustrated in exhibit 1, showing the GDP trajectory from 2005 up towards and after the 2008 financial crisis.  

Pre-crisis we often see a boom, as debt accumulation enables a growth in demand and thus in the overall economy (1). Then comes the crash (2), most often triggered by a lack of liquidity. Then, as companies collapse (3), a solidity crisis appears. Employment rates decline. Unemployment soars. This weakens government finances as the governments foot the bill (4). This was the trigger of the euro-crisis, lowering the European growth rates well below those of the US and most other countries. 

Even worse, the combination of unemployment, weak government finances and low investment rates turned the 28 EU-countries into growth laggards (5). 

The buckets of macroeconomic impact from the corona crisis

Capital markets were at all-time high when the corona-virus appeared. Unemployment was at a 40-year low, most notably in the US and in the UK. 

As the corona virus first hit China, then Europe and then the US actions were taken.

Our expectation as of today is an economic crisis in seven stages:

1. The shut down; Power consumption in China fell approximately 25% in China as the Chinese authorities moved to lock-in the virus. Along trend the power consumption develops in line with GDP. However, if one assumes manufacturing and market services to be hit the most, a 15% GDP decline, year-over-year, may be assumed. Smoothed over the year, a 4% GDP-decline for 2020 may be on the cards for China. This, however, dwarfs in comparison to the impact on Europe and the Americas. Google har measured “workplace mobility. The figures, exhibit 2, shows a drop in the US of 38%. US unemployment has reached 10 million, and it has only just started. The possibility of a 35% decline in GDP, Q2 2020 over Q2 2019, has been mentioned. 

2. The liquidity crisis; Ideally one could shut down the economy for some weeks. Thereafter it could be restarted. The Chinese extended the Chinese New Year celebration. Putin announced a one-week corona vacation. Unfortunately, this isn´t how it works. Companies, households, banks and even governments may see themselves facing a liquidity crisis. They may still incur costs. They may still have interest payments. Their loans may expire. Or, worse, they may depend on financing from their future customers´ prepayments. As the airlines. Or, customers and borrowers may default. 

3. The solidity crisis; Next comes the solidity crisis. Government measures may save many companies, but many will fall. They may not be able to back their co-financing requirement required by the government schemes. Norway had a banking crisis in 1992, wiping out the equity of all the leading banks. They had incurred almost no losses on their lending to households, but had lost 12% of the value of their corporate lending.

4. The structural hit to the economy; Unemployment has risen at a dramatic speed. However, it tends to decline more slowly. The Norwegian economist, Leif Johansen, established a model with a ratchet effect (1982). Some employees may fire all, but only hire the ones they consider to be most productive. Thereby unemployment will stay high. The 2008-financial crisis was followed with a prolonged period of unemployment. Furthermore, the corona-crisis will reveal yet another feature. It shows the vulnerability of the global supply chains. At best, this will take some time to fix. At worst, trade will be hindered.

5. The crisis of the government finances – again; Most governments have launched mitigation and relief measures, and some have launched stimulus packages. The Danish government will pay the fixed costs of Danish businesses. The Norwegian government will pay parts of the fixed costs and compensate employees. Trillion-dollar packages have been launched and more are expected. The impact of a recession on government finances was calculated in Sweden, when Sweden had its 1992 financial crisis. 70 cent of every dollar loss of GDP was carried by the state, as tax revenue fell, and support measures were implemented. The ratio is lower in non-welfare state economies. Maybe half. Now, remember 2008; A weaker economy lowered the tax base and increased unemployment payments and other government contributions. Banks were bailed-out. This hit government finances, leading to distrust and some years later, in 2012, to the Euro-crisis. Exhibit 3 shows the gross debt of the general governments in some countries. It shows the debt increase post-2008, the continued deterioration since then for a handful countries, the dire situation of countries as Italy, Spain, the UK and the US, and the improvement achieved through determined action in some countries, most notably Germany, Denmark and Sweden. The US, however, sadly, was in deep trouble on its government finances, even before the corona hit. Its gross debt was growing from a high level, and the 2019 deficit was the highest ever, comparing peacetime, peak-business cycle eras. Now, the hit to the government finances from the corona will exceed the impact of 2008. With a wide margin. 

6. An era of sluggish growth; Somewhat paradoxically, Europe´s largest hit from the euro crisis came through the decade that followed. Imbalances were created. Austerity programs were run. Investments were sluggish. Remarkably, Italy´s 2019 GDP was way below its 2005-GDP. 15 years of stagnation. As the corona crisis hits and the government´s balance sheet weaken more of the same may be expected. 2008, however, also teached us some other lessons. In Iceland, in contrast, all three major banks defaulted. Half the companies had lost their equity. Now, the balance sheets were restructured. As the country mobilized its human capital, business systems and resources, the country delivered a growth performance exceeding almost all Western countries. 

7. An additional hit for the oil economies; Lastly, a collapse in oil prices run in parallel with the corona-crisis. Some large importers, foremost China and India will benefit. Oil producers and countries with large oil service industries, especially Norway, will suffer.

This time it is different

Every crisis has its own logic and impact. Most often crisis are triggered by excessive debt, lack of liquidity or imbalances in trade or government finances. Typically blended.

This time its different. We have a lock-down. Stores close. Service companies are shut. Manufacturing plants have halted, for health concerns, due to lack of supplies, lack of customers or a break-down of the logistics chains. Polish truck drivers don´t dare to drive into France, as they fear they can´t again get home.

In short, the productive capacity of the economy is about to be halved. Also, demand is gone. We all stay at home. We buy groceries, pharma products, paint and digital services. But, that´s about it.

Economic theory tells that increased government spend is a way to compensate a demand short-fall. This time, however, such a tool is a dangerous two-edged sword. It may pump-up latent demand, but still we won´t go shopping and the stores are closed.

The government money

The current crisis stretches the limits of our understanding of economics. Even the most basic questions must be asked; What is government money?

In Denmark the government has promised to pay, compensate, the fixed costs of the companies. Additionally, the government is to pay unemployment benefits. 

The Danish governments, as the Swedes, have done a truly impressive job over the last decade to strengthen the government finances, as seen in Exhibit 3.

But the basic questions remain; From where will the Danish government get the money?  Naturally it can only get it by leveraging its current and future tax base; by taxation of its companies and households. Raising current taxes is no option. On the contrary, deferment of tax payments is also one of the measures.

Thus, the Danish government must, naturally, borrow the money. And repay it through future taxes. 

Economic theory tells us that taxes and government lending are mechanisms to reduce private sector demand, thereafter transferring the purchasing power, the access to resources, to the governments. 

It gives “room in the real economy” for the Government spend. 

Thereafter the Government may spend the money itself, pay its employees, or transfer fund back to other parts of the private sector.

As it now does. But, with halved production, there is basically still no resources to be accessed. There is no “room in the real economy”.

In the extreme case, the government money can help pay the bills of the small- and medium enterprises and the unemployed, but with halved production its only “paper”.

Sovereign wealth funds and the “oil funds”

Some governments are even more fortunate as compared to the Danes. They have reserves accumulated, some even large holdings of equity and bonds. 

Government bonds provide a right to access the tax proceeds of other countries, as they tax their now struggling companies and households. 

Corporate bonds provide a right to access the earnings of the companies. The shares give a right to access the profit, today and in the future.

But, as said, where there is nothing even the emperor has lost his rights. 

Whatever it takes

As countries see themselves in a period of crisis, we see behaviors not otherwise expected. 

In October 2008 the UK placed Icelandic institutions on its list of terror organizations to block transfer of funds from the UK. Iceland found itself alongside Al-Qaida on the list of its long term-ally. 

Now, in 2020 the US has forbidden exports of critical medical equipment, even to its long-term allies. France has seized supply destined for Spain. European borders are shut. Trump refused transfer of ventilators from federal warehouses to New York. Numerous countries have passed, or are about to pass, emergency legislation transferring authority from Parliaments to Governments. Hungary may become EU´s first dictatorship. Texas is joining Russia and OPEC, likely alongside Mexico and Norway, to balance oil markets.

And, we are only at the start of the beginning.

Many, otherwise scary, thoughts emerge as one reflects on the meaning of “Whatever it takes”. It does imply, one would assume, that some rules or restrictions, agreed or self-imposed, otherwise obeyed will be broken.  

With export restrictions, as from the US already in place, restrictions on other critical supplies appear to be the first candidate. 

Germany breached the EU rules on government deficits as it financed the unification of Germany. A significant event in the context of history, but with minor costs in comparison to the costs of the lock-down. Some central banks took interest rates below zero in their attempt to get their countries moving after the 2008 financial crisis and the euro crisis. A move previously unheard of, but still not in the “whatever it takes”-category as inflation stayed within its defined limits. No rules were torn apart. Next, a momentous effort of money printing started. Central banks bought corporate and government bonds, again to stimulate economies. But, again, not really a breach. 

Now, however, we must brace ourselves.

While the lock-down lasts “compensation” is what is needed. Households, companies and banks will require government money. But as production is down, no real economic capacity, production, backs the transfer.

Post-lock down the companies, households, banks and countries will need stimulus. Again, allocation of government funds appears as the obvious candidate, advocated by most. Allocating funds to compensate and to stimulate – “helicopter money” – named after the concept of dropping money out to all citizens from a helicopter – may be what´s next. 

Conveniently, in 2020 no helicopters will be needed. Money transfer can happen digitally, over the week-end. 

But, many governments don´t have the funds, don´t have the tax base, and – more importantly – there are few products and services produced that matches its stimulus. Post lock-down the purchasing power of the helicopter money will compete with old money in a fight for modest resources. Markets may be cleared with the most effective and invisible tax of all. 


The outcome may be what we saw in the 1970ies and 1980ies; inflation and stagnation combined.


That´s the negative story. 

Some may see a silver lining. Finally. Finally, they may say. Finally, old dogmas are terminated. Finally, the state can use all its powers to move the economies forward. Inflation may be the least of our problems.

Its only money – The paradox of value

Last and not least; the largest driver of productive capacity in any country is its people.  Hence, there is perfect alignment between public health considerations and economics. Next in importance comes the productive systems, the competence and technology. Then comes the fixed capital, the machines, equipment and buildings. Last comes the natural resources. All based on the contribution to GDP and the allocation of the value created.

Money isn´t on the list. Financial balances ain´t on the list of creators of GDP. They “only” steer the allocation.

The zero-interest rate policies and the monetary easing of the last decade, put in place to stimulate economies to the benefit of all, also triggered an enormous reallocation of values to the benefit of the 0,1% wealthiest of the world.

The virus, the lock-down, the governmental measures, the loss of liquidity and solidity of companies, households and banks and the long-term impact of the lock-down and policy measures may lead to a comparable reallocation of economic value, of wealth. 

Most likely in the opposite direction. 

This, however, is as such, as brutal it may sound, not necessarily a societal loss.

The suffering of the corona is a societal loss. The lock-down causes a societal loss, as people´s lives are put on hold and the economy stops. 

Hopefully, only for a short while. But, the world will be different.