Jan Švejnar: Big question is can government deliver smart quarantine if new wave of pandemic hits

The Czech government’s willingness to tackle the economic impacts of the coronavirus crisis is impressive, but it must do far better when it comes to actually delivering help to hard-hit companies. And the economic slowdown could even reach double digits if another lockdown is required. So says Professor Jan Švejnar of Columbia University, who has headed a team of economists advising the Czech Republic’s Central Crisis Staff, the national Covid-19 task force.

Jan Švejnar|Photo: Elena Horálková, Czech Radio

“The Czech Republic is fortunate that it managed to get the coronavirus under control relatively early, so in that sense it is ready for an opening.”

This interview is going out on Monday, the day of the final stage of the government roadmap to get many aspects of the Czech economy going again. How do you view the timing of this, and the previous steps we’ve seen of this restart?

“I think it is important to restart the economy whenever it’s appropriate.

“The Czech Republic is fortunate that it managed to get the coronavirus under control relatively early, so in that sense it is ready for an opening.

Photo: Oleg Gamulinsky, Pixabay / CC0

“I think the big question is whether in terms of epidemiological testing, the ability to have smart quarantine, tracing people and so – whether it is capable of containing a new round of the pandemic, should it happen.

“Hopefully it will not happen, but I would say that is the one area where we’re concerned.”

What do you think of the efforts so far to bring in this smart quarantine? It seems to quite slow to date.

“Yes. I think there has been a problem coordinating within the medical profession, the healthcare sector, and getting the epidemiologists who work in the government institutions or government-related agencies working with those who are in research institutions and independent centres.

Photo: Gerd Altmann, Pixabay / CC0

“And also there is a group of economists amongst us who are trying to build economic epidemiological models and in that area there have been some problems, some issues in having access to the epidemiological data.

“So that has been, I think, a problem, yes.”

You’re an academic so you’re used to grading people – what mark would you give the Czech government for their handling of the economic aspects of the coronavirus crisis so far?

“I think that there are two grades that I would give [laughs].

“One is for the willingness, the plan, how to tackle it.

Source: Ministry of Labour and Social Affairs of the Czech Republic

“There the grade is very high, because the government is – after Germany – among the first in Europe in terms of the amount of resources that it is planning to make available, through direct transfers, through loans, through a variety of guarantees.

“When it comes to the actual disbursement, the actual realisation, it has been very slow.

“So there indeed there has been an issue, has been a problem.

“We as an advisory team and others have been pointing this out and trying to work with the government in terms of speeding things up and making the help be more available.

“Hopefully it’s now going to start being more available.

“But I would say that was a relatively weak link in the whole enterprise.”

Photo: Trending Topics 2019, Flickr, CC BY 2.0

If we look at some of the schemes that are already in place, one of them is “kurzarbeit”, which I think in English is called short-time working, under which the state pays part of the wages of workers, basically to keep people in jobs. How long is that sustainable, given that we don’t know how long this situation is going to continue?

“I think that from the standpoint of the Czech economy the government can afford to make it be available longer than other countries can.

“So definitely it’s worth having it for a few months, just to see how the economy is doing.

“The reason that the government can afford to do it is that the Czech national government debt relative to GDP, so the debt-to-GDP ratio, is very low by international standards.

Photo: Miloslav Hamřík, Pixabay / CC0

“So the government can afford to spend resources, to increase its debt, to run a budget deficit for a number of months and still be in very good shape fiscally.”

Was the government right to say so soon that they would require a budget deficit for this year of CZK 200 billion and then CZK 300 billion? Given the nature of this crisis, with so many unknowns, how can the government be sure that CZK 300 billion even will be enough? Isn’t it possible that in a few months they’ll have to come back and say, Actually, we’re going to need a lot more money?

“Yes. I think that’s the case.

“And that’s true with all the governments around the world, essentially.

Czech government, photo: Archive of the Office of the Czech Government

“You need to make sure that people find your steps credible, that you’re willing as the government to put a lot of resources in, so you reduce the uncertainty, which is one of the main problems during this period.

“And the Czech government can be credible, because as I said, even a substantial deficit is not really going to make its debt situation unbearable.

“So in that sense I think that it’s a good idea.

“In fact they said that it would be over a trillion crowns, so it’s a high level, the intended set of measures.

“Not all of them are direct budget deficit: some of them are guarantees and so on.

Photo: Gerd Altmann, Pixabay, CC0 1.0 DEED

“I think it’s important that the government does this.

“And in some sense the slow start may have reduced a little bit the credibility of the whole package.”

How much do you think the Czech economy is likely to suffer this year? What will the slowdown be?

“So we as an advisory team have been working with a decrease of 7.5 percent or 8 percent, roughly, which is more than what the Ministry of Finance was predicting earlier this year.

“I think that we are closer to the real number.

“Of course the worrisome aspect is if there should be a second phase of the epidemic and another lockdown or semi-lockdown; then I think the decline would be in the double digits.”

Photo: Gerd Altmann, Pixabay, CC0 1.0 DEED

Unemployment is usually one of the last indicators to reach a peak, at least in Europe. When do you think the Czech Republic is really going to feel the pain of joblessness?

“I think that it’s coming slower than elsewhere.

“It has done so always. If you look at the last recession, the great recession of ‘08/’09, the data always indicates that it comes slower than, let’s say, in the United States.

“But it is coming. The measures, like the kurzarbeit as you mentioned and others, are softening the impact.

“But I think that we have to think that the unemployment rate could go to 5, 7, even 8 percent, unfortunately.”

“We have think that the unemployment rate could go to 5, 7, even 8 percent, unfortunately.”

I was reading a previous interview with you in which you said that Czech unemployment benefits are too low and need to be increased. Why is that?

“The unemployment benefits were set for a period when the unemployment rate was very low and very few people needed to draw on them – and very few for a long period of time.

Photo: Michaela Danelová, Czech Radio

“Now it’s a different situation.

“For a lot of people now this is a shock, a lot of people are losing their jobs, or will be losing their jobs.

“And it’s important that they be compensated so that they can look for jobs, that they really maintain their living standards, at least temporarily, and can find a new job.

“Even the United States, which is the least social state among the various countries, has between doubled and tripled the unemployment benefits for the first few months.

“So in that sense it makes absolute sense for people who become unemployed, at least for a couple of months, to get somewhat higher benefits.

Illustrative photo|Foto: Hans Braxmeier, Plant Hide Ltd / Pixabay, CC0 1.0 DEED

“It’s also important from an economic standpoint that those people will consume virtually all the income that they get – so it will stimulate the economy.

“One problem is that the economy has insufficient demand. Firms are postponing investments, people are postponing spending, and that of course exacerbates the recession.

“So giving those people, who will spend virtually every crown that they receive, these subsidies makes sense also from the point of stimulating the economy.”

The Czech crown has weakened considerably in the last couple of months. Should that be a cause for concern?

Photo: tungphoto, FreeDigitalPhotos.net

“I wouldn’t worry about that.

“It really is something that happens totally naturally.

“When you look at the fluctuation of the dollar and the euro over time it can easily be 50, 60 percent – here it’s much less than that.

“Actually the weakening in some sense helps Czech firms, because the exporting firms are more competitive on export markets, the domestic firms that are competing against imports are more competitive, because imports are more expensive.

“So temporarily it actually helps producers.

“Of course it makes things more expensive for the consumers, so those who are looking at it from the standpoint of what they can buy from the eurozone naturally are feeling the pinch, yes.”

Great Depression, photo: National Archives at College Park, Wikimedia Commons, CC0

I’d also like to ask you, on a global scale how serious do you think this crisis can get? The obvious comparison that springs to mind is the Great Depression, but that was 90 years ago when it was clearly a very different world.

“Indeed. But the US economy, to which you referred, is a good bellwether in the sense that you really see the impact visibly, for instance in the unemployment rate.

“The unemployment rate in the United States was 3-plus percent, very low, and is now 15 percent and heading higher.

“So that is an impact that is very comparable to the Great Depression of the 1930s.

“It indicates that actually the shock is bigger than many other indicators would make us believe.

“So unfortunately, yes, the decline is very steep.

Federal Reserve Bank, photo: Mr.TinDC, Flickr, CC BY-NC-ND 2.0

“But we’re hoping that if the pandemic is under control, then through the restart a gradual boom will happen and return, not necessarily exactly to the level where we were in the short run, but at least to levels that are more tolerable than the current situation.”

From the outside, the US looks to be in really big trouble, economically. But I’ve seen that you’ve said that the EU may ultimately suffer more in the longer run than the US – why do believe that?

“I believe it because the US has a well-coordinated approach.

“The policy in the United States is quite aggressive.

“The Federal Reserve Bank has had more room to maneuver than the European Central Bank.

Photo: Gerd Altmann, Pixabay / CC0

“The fiscal packages are quite substantial.

“So even looking at the last great recession 10, 12 years ago, the US bit the bullet, so to speak.

“It really took tough measures early on – and managed to get out and start growth much earlier than in Europe.

“And in Europe we have again the North versus South division, a unified policy is hard to accomplish, and most of the policies are at the national level.

“I expect that the shock in Europe, while similar in terms of the external shock, will be harder to manage.

“So in that sense I think that, unfortunately Europe has a really difficult task to manage things.”

“I expect that the shock in Europe, while similar in terms of the external shock, will be harder to manage.”

Getting back to the Czech Republic, I’ve heard several experts saying that the Czech economy, that it can bounce back quite quickly. We’ve already touched on that a little bit. Do you think that the Czech economy is in a good state to bounce back relatively fast?

“Yes. I think that it has better fundamentals than others.

“I mentioned the fact that it has relatively low debt, compared to the rest, so it has more room to maneuver.

Photo: Gerd Altmann, Pixabay, CC0 1.0 DEED

“It has firms and banks that are in better shape, on average, than in many other countries.

“It is linked quite a lot to the German economy, which seems to be doing better than other economies in Europe. So, yes.

“On the other hand, it’s very export-oriented and to the extent that the export market is going to be weak, the Czech economy is going to suffer.

“Some informal indications are that export-oriented firms are losing 30 to 60 percent of their market, right now.”

“And in fact some informal indications are that export-oriented firms are losing 30 to 60 percent of their market, right now.

“Now that may bounce back, and hopefully it will, but the instantaneous shock is very strong.”

Finally Professor Švejnar I’d like to ask about your situation – how are you coping with this terrible time?

Columbia University, photo: Bitterteayen, Wikimedia Commons, CC0

“I have a relatively easy time coping, relative to others, in the sense that I’ve finished the semester at Columbia University.

“Half-way through the semester we switched to doing all the courses online.

“Everything worked really well. The students worked very well, classes met, presentations took place.

“At one point I had a team of students presenting with one person in Vienna, one person in Rio de Janeiro, one person in Beijing and one in New York and it worked perfectly.

“So in a way it’s an example of an institution where things work and all teams – students, faculty – work very well.

“I am looking forward to repatriating to the Czech Republic next month – hopefully that will be feasible.

“So I’m hoping to cope as well as one can, given the circumstances.”