Page 52 - COVID-19: The Great Reset

the European Central Bank promised to buy any instrument that
governments would issue (a move that succeeded in reducing the

spread in borrowing costs between weaker and stronger eurozone
members).

Concomitantly, most governments launched ambitious and
unprecedented fiscal policy responses. Urgent and expansive
measures were taken very early on during the crisis, with three

specific aims: 1) fight the pandemic with as much spending as
required to bring it under control as rapidly as possible (through
the production of tests, hospital capabilities, research in drugs and

vaccines, etc.); 2) provide emergency funds to households and
firms on the verge of bankruptcy and disaster; and 3) support
aggregate demand so that the economy can operate as far as
possible close to potential. [45]

These measures will lead to very large fiscal deficits, with a

likely increase in debt-to-GDP ratios of 30% of GDP in the rich
economies. At the global level, the aggregate stimulus from
government spending will likely exceed 20% of global GDP in

2020 with significant variation across countries, ranging from 33%
in Germany to more than 12% in the US.

This expansion of fiscal capabilities has dramatically different
implications depending on whether the country concerned is
advanced or emerging. High-income countries have more fiscal

space because a higher level of debt should prove sustainable
and entail a viable level of welfare cost for future generations, for
two reasons: 1) the commitment from central banks to purchase
whatever amount of bonds it takes to maintain low interest rates;

and 2) the confidence that interest rates are likely to remain low in
the foreseeable future because uncertainty will continue
hampering private investment and will justify high levels of
precautionary savings. In contrast, the situation couldn’t be starker

in emerging and developing economies. Most of them don’t have
the fiscal space required to react to the pandemic shock; they are
already suffering from major capital outflows and a fall in
commodity prices, which means their exchange rate will be

hammered if they decide to launch expansionary fiscal policies. In

51