The Swedish newspaper spoke with former IMF chief economist Olivier Blanchard about what the world will face as it recovers from the pandemic. A global economic crisis is inevitable, Blanchard said. The most difficult thing is yet to come, and it will take years to cope with all the consequences.
To return even to a semblance of the norm, we will need more time than many think. Former IMF chief economist Olivier Blanchard urges governments around the world to open wallets and save lives.
If anyone has a history of crisis situations, it is Olivier Blanchard. He just didn't have a choice.
The Frenchman became chief economist at the International Monetary Fund in September 2008. Two weeks later, the global economy felt like it was in free fall as the result of the bankruptcy of investment bank Lehman Brothers. This was followed by the financial crisis, the eurozone crisis, the debt crisis of Greece and many other countries. And the chief economist Blanchard and the International Monetary Fund, who often had to issue loans, dealt with everything.
Today Blanchard's work is associated with the respected American Research Institute for the World Economy Peterson. On the Institute's website, "financial crises" are at the very top of the list under the name of the 71-year-old expert, because this is his main area of expertise.
So the advice to fork out is given to the authorities around the world by no one.
“I think this crisis should be divided into two stages. The first is to try to reduce the number of people infected and give healthcare systems everything they need. It is expensive but necessary. At the second stage, it is necessary to continue to contain the incidence of coronavirus, and only then will we be able to take the first step back to normal, - says Olivier Blanchard, but he immediately corrects himself: - To some kind of his.
This stage will not begin until summer. In June, and possibly July, Blanchard said. He himself must not leave the house now. He spent most of his life in the United States, and Washington, where he lives now, has been completely closed for several days.
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“I don’t think it will be possible to remove all restrictions at once. This must be done with extreme caution. It is possible that after the authorities lift certain restrictions, the number of infected people will increase and they will have to be returned again."
He makes it clear that difficult times are coming, because many who have not yet been ill or do not know how strong his immunity is are greatly alarmed. This is why, Blanchard suspects, our economies may be slower to recover than many claim.
“I interviewed my friends to get a picture. Will they, as usual, go to restaurants and take the subway in July if the number of infected cannot be reduced to zero? Most of those I spoke to answered negatively."
Therefore, Blanchard does not believe in the V-curve and quick recovery that many talk about. For example, Swedish Finance Minister Magdalena Andersson predicted at the end of March that the recovery will be “strong and fast” and that Sweden's GDP, which will fall 4% in 2020, will rise by 3.5% in 2021.
Of course, Blanchard is not talking specifically about Sweden - he does not follow its economy so closely. His calculations relate rather to the economies of developed countries as a whole, whose GDP, according to him, in 2020 could fall from 5 to 15%.
He cites France as an example. The French analogue of our Central Bureau of Statistics recently published calculations that show that in March the French economy contracted by 35%.
“This is how a complete stop affects the economy. And nothing can be done about it. Stimulating demand will not help, because nothing is being produced. It is reasonable to assume that in six months or by the end of the year we will be only halfway to normal life."
In this regard, China comes to mind. On the day of our interview, information appeared that the Chinese economy is recovering at an incredible pace, and this can be portrayed as an almost perfect V-shaped curve - with a sharp drop and an equally sharp rise.
What is this, a success story that we should all be happy about? It is immediately evident that Olivier Blanchard is skeptical.
He does not say directly that the Chinese authorities are lying, but mentions a website that monitors traffic in the world's largest cities in real time.
“Traffic is a good indicator of activity. Beijing says all their factories are now operating as usual. But yesterday's figures from this site tell a different story. In Beijing, traffic is now half of normal. In the rest of China - about 60%, "says Blanchard and adds that, obviously, we" can't just turn the page, and everything will be the same."
Despite all his years in the United States (he moved to the country in the 1970s to do his doctorate at MIT in Boston), Olivier Blanchard still speaks English with a slight French accent. At some point during the interview, he tries to remember a word that has gone out of his head, and I suggest that he speak in French instead.
In response, he laughs and responds shortly: "As if it will help."
It seems that Blanchard is now no less American than European: this becomes clear when, after a while, he calls Trump "our" president. Olivier Blanchard says he doesn't want to criticize Trump. But then it does exactly that.
Trump's inconsistency in this situation is alarming, says Blanchard. In his opinion, this could be very costly for the United States.
Olivier Blanchard is much more pleased with the actions of the American central bank - the Federal Reserve System. She has worked flawlessly so far, he said. He also praises the European Central Bank (ECB) and his former naval boss, Frenchwoman Christine Lagarde, who recently took over at the helm of the ECB's high-rise in Frankfurt.
“They did a lot. Lagarde made the mistake of not supporting Italy at the start of the crisis, but she made amends and made it clear she was willing to allocate more money if needed. So yeah, I'm impressed and I have no complaints about how central banks operate."
This applies to most governments as well. Of course, there are some controversial, in the opinion of the economist, measures, but in general, everyone reacted correctly.
So what experience from the past financial crisis, or the “great recession,” as it is called in the US, can we use now? Olivier Blanchard answers very clearly:
“After the big financial crisis, it was a mistake to introduce austerity measures too early. Everyone feared that public debts would grow and felt it necessary to keep them low. As a result, recovery in much of Europe has been slower.”
So Blanchard thinks it's time to get used to higher debt. Interests will be low for a long time, and even a country like Italy can pay the bills - of course, if the market does not lose confidence in her. Although, in his opinion, this will not happen if the ECB continues to buy Italian government bonds.
“I think we should accept the fact that many countries will have public debts of more than 100% of GDP. And this will continue for a long time. We can start taking action when growth is stable. But it will take many years,”says Olivier Blanchard.
Therese Larsson Hultin