November 30, 2020

Antonia Díaz and Luis Puch: Plan of plans


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The start of the second week of confinement by Covid-19 was marked by the request of the Spanish Government for a kind of “Marshall Plan” against the crisis. We believe that the Spanish economy, right now, does not need massive investments in infrastructures but to direct all its resources to attend to the health emergency and keep the pulse of private activity that, in order not to increase contagion, must idle. It is very important to take the right steps at the right time.

It is a priority that the professionals and the health administration demand what they need – be it equipment, PPE, facilities – and give it to them quickly. To maintain the economic pulse (and to take as little as possible to return to normality), two political actions are essential: 1) pay wages and social contributions, as well as the incomes of vulnerable families; and 2) pay the maturities of the loans and lines of credit of the economic agents.

In the first case, the company without income can give its workers vacations or qualify for an ERTE, and the Government will have to use its resources to support the income of families and prevent companies from closing. A well-designed financial plan will alleviate the burden on public accounts of the maintenance of families’ wages and incomes if the situation continues. To this end, the possible interventions of the European Stability Mechanism (MEDE-ESM for its acronym in English: the Treasury created by the European Council in 2011), which need to be finalized as soon as possible, could send the Government of Spain sufficient resources (about 100,000 million euros) for the volume of spending required and, if necessary, the coverage of the guarantees that we refer to below.

The second case, in principle, does not require disbursement from the State in the first instance. However, the slowdown in business activity strains the credit market. The financial system manages the payment lines to suppliers that serve large companies, and must be in a position to sustain them. For this, the renewals of credits that are due and the new lines need public guarantees and guarantees, in addition to moratoriums and grace periods. This action must be coordinated by the Bank of Spain for it to work properly, since it is the body that has the data about the short-term financing that the financial system provides to companies. With these data, it could be preparing the guarantees for the credit lines that are to be supported by the Spanish Treasury (via MEDE) and by the ECB. The financial system also has financing mechanisms through the assignment of future collection rights, which could be expanded with adequate capital guarantees. All these contracts must be written as soon as possible. The Spanish economy is in a position to offer this moratorium on company payments, and to advance payments to the self-employed, micro-companies and SMEs. Right now, in the worst of the health emergency, there are completely unemployed sectors, but others are frantic. It is the time of Risk sharing: today for you tomorrow for me. For example, the bank will postpone the rent of its social housing for three months, or has offered to relax the collection of commissions and extend the term of return of short-term loans. The time will come, in the short-medium term, for “a great investment program” through the European Investment Bank.

We do not know what the way out of the crisis will be, if in the long-awaited “V” or the worrying “U”. This is where the ECB and the European Council come in, as we have said. We doubt that the European Council agrees to the issuance of Eurobonds. For this reason, we believe that the Government should concentrate an important part of its efforts on the good design of the policies outlined in the previous paragraph, as well as on credible economic recovery scenarios, so that the financing of the MEDE Fulfill its role, without significantly increasing debt to GDP levels and with a moderate interest burden. There is not a minute to lose. The better that design is at the domestic level, the better our position will be within the Eurozone.

Antonia Díaz is professor of Economic Analysis at the Carlos III University of Madrid and Luis Puch is professor of Economic Analysis at the Complutense University of Madrid

Antonia Díaz and Luis PuchAntonia Díaz and Luis Puch

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