We would end up in the worst of all worlds, with multiple waves, and another forced closure of the economy to avert a winter tsunami, requiring trillions more in fiscal relief.
The only viable path is to contain the virus – to drive the Ro transmission rate below 1.0 – and hold it down by East Asian means of “testing, tracing and isolating” as we shift from an acute phase to a chronic phase. We are not close to achieving this. We lack the testing infrastructure at scale – even in Germany – and little is being done to prepare the public for tracking surveillance.
“We need a vaccine. Until we get one, the stock markets are in cloud-cuckoo land,” says professor Anthony Costello from University College London.
The IMF’s most extreme scenario is all too plausible. It assumes the pandemic drags on, with a second outbreak in 2021. This would cause output to contract by almost a tenth and set in motion a “non-linear response of financial markets” – fund parlance for defaults and panic.
Public debt ratios would jump by 20 percentage points of GDP. The shock would push Italy’s debt above 175pc of GDP. Ratios would rise to 155pc in Portugal, and to 135pc in Spain and France. In my view, such debt spirals among sub-sovereign borrowers would render monetary union dangerously unstable unless the EU faced up to its “Hamiltonian” moment and agreed to fiscal union. The evidence is that Europe is not about to do any such thing.