The scars of the financial crisis of 2008 were visible in the global economy for years, and the current coronavirus crisis will undoubtedly have similar effects. In Finland, the lack of economic growth will mean about 10 billion fewer euros for welfare this year. Jaakko Pehkonen, a professor of economics from the Jyväskylä University School of Business and Economics, praises the prompt first actions Europe and Finland took to tackle the coronavirus crisis, both parties now wiser due to the previous financial crisis. He says that now we must increase risk-based decision-making so that we do not waste resources.
Both the financial crisis of 2008 and the coronavirus crisis have shaken the global economy fundamentally, but they originate from different starting points.
“In the financial crisis, the question was about which banks had valueless bonds in their portfolios and which didn’t,” says Professor Jaakko Pehkonen. “In the current crisis the question is about who has the coronavirus. In the financial crisis, the stalling of financial markets and global trade caused a supply shock. In the coronavirus crisis, both supply and demand were paralysed simultaneously as supply chains broke down and consumer demand plummeted.”
Both crises, however, are fundamentally about the same things: uncertainty and fear.
The financial crisis was managed in the United States with an aggressive monetary policy. Creative destruction was allowed to make its work, resulting in collapsing banks. In Europe, the road was different; monetary policy was loosened slowly and politicians focused on building support systems for the banking system.
The breakout of the Covid-19 crisis showed that something had been learned from the previous crisis.
Money taps were now opened quickly also in Europe and the amount of loan money to revive financial policy even exceeded the USA. Europe had learned to avoid procrastination while the reaction in the USA was largely similar as it was in 2008.
Health issues turn to financial ones: Finland will have 10 billion euros less for welfare expenditures from economic growth this year
The coronavirus halted normal activities of people and companies in Finland as well. The public sector intensified the effect with its restrictions on movement and commerce.
Pehkonen suspects that the crisis will not end before general uncertainty goes away, which in practice requires the introduction of a coronavirus vaccine. The problem is that after the crisis has ceased, people will have more needs but less financial resources to fulfil them. Over time, health worries will increasingly turn to financial worries.
“We have seen almost 200,000 temporary lay-offs since March,” Pehkonen says. “At the end of the year, Finland will probably have about 100,000 more unemployed than a year before. The country’s debt obligations will grow by 20 billion euros. The lack of economic growth means there will be about 10 billion euros less for welfare.”
“The outcome of the financial crisis was a downturn in the Finnish economy and slow growth. The current crisis seems that it will turn Finland into a country with a higher public debt than earlier. At worst, the debt-to-GDP ratio may climb to the level of 100 per cent at the end of this decade.”
Support for the protection of risk groups, but accumulating health care costs have been discussed less
From the perspective of the national economy and society, Professor Pehkonen sees both good and bad things in the measures taken to manage the coronavirus crisis in Finland.
“Securing the health of risk groups and the operating ability of health care are unquestionably the most positive things. In financial policy, stimulus measures were started immediately. Individuals and companies received support and the common European fiscal policy was given full support. Determined actions were taken.”
However, there’s still something to criticise.
“When looking at health at the population level, the crisis has had negative impacts that have received relatively little attention. For example, the quarantine measures at the beginning of the crisis hit older people in institutional care especially hard. Older persons’ ability to function weakens rapidly in exceptional circumstances and this may have significant effects on their health.”
“In the spring, there were about 700,000 fewer outpatient visits than in the previous year. Treatment queues are becoming or have become longer. Illnesses are diagnosed too late or left unnoticed. Unemployment, the prolonging of unemployment and marginalisation cause significant health and financial damage.”
Resources diminish if risk-based decision-making is not increased as the coronavirus crisis continues
According to Professor Pehkonen, risk-based decision-making has been scant in Finland. Restrictions are mainly the same for all even though risks would be small for most people. Uncertainty leads us to waste a large share of resources.
“Surely this can be called prevention or taking precautions,” Pehkonen says. “But it has been costly – and will be so in the future as well.”
Many are thinking about the future and the time after the crisis. How will society make it through the crisis?
“We will surely survive this financial crisis as well, but as after 2008, it will take time,” Pehkonen says. “It will probably take the whole next decade to recover. In that time the standard of living will hardly improve. It is especially worrying if important employment targets are not achieved and debt continues to increase every year.”
Bigger buffers needed in public finances to be prepared for new crises
Pehkonen calls for better buffers in public finances. As a rule, the state budget should show a surplus. This would accrue buffers for a rainy day.
“Now we are forced to make decisions with our backs up against the wall. The government should be the last safety net to lean on, and now we always need to weave the net at the last minute. The margins are too narrow.”
Therefore, preparations for crises should be made when the economy shows an upward trend. This has not happened in recent decades and will probably not succeed in this decade either. Again, the next financial crisis will be faced with weaker resources than the earlier one.
“In recent decades, we have built a common Europe mainly through crises, sometimes even under the pretext of crises,” Pehkonen says. “This is not a good starting point. Breaking common rules and new interpretations of agreements do not create a solid base for common financial policies or a more unified Europe, even though that is exactly what we would need in this global world.”
“My current forecast for Europe is not good: economic growth will be slow and growing debt will eat an increasing share of society’s resources. Europe will undergo ‘Japanization’ as interest rates remain low and the amount of debt increases.”
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