Back To Top

[Editorial] Unprecedented crisis

Limits on fiscal, monetary steps; budget review needed; policies must be zero-based

The coronavirus pandemic is causing panic in the global economy.

Restriction on human movement and activities has frozen production and consumption, and unsettled financial markets. In a vicious circle, unease in the markets is depressing the real economy further.

The problem is that traditional polices to goose the economy, such as interest rate cuts and fiscal spending increases, bring little effect.

On Monday, in local time, the Dow Jones Industrial Average crashed nearly 13 percent to close at 20,188. On Feb. 18, just about a month ago, the market was bullish with the Dow Jones closing at 29,232. Markets in Asia, Europe and the US have been falling back-to-back. The local Kospi closed 4.86 percent lower at 1,591.2 on Wednesday.

Taking a cue from the US Federal Reserve, which cut its benchmark interest rate to near zero, central banks in Japan and major European countries slashed rates drastically and unveiled quantitative easing steps. The Bank of Korea followed suit, too, reducing its benchmark rate to 0.75 percent.

But investors are little moved. Market jitters rather appear to be intensifying. Fright in stock markets means that investors are pessimistic about the prospects of the economy.

How fast the global economy will get out of this complex crisis of financial markets and the real economy depends on how fast the global community will get out of the coronavirus crisis.

But given sluggish and lax responses by the US, Europe and Japan to the fast and persistent spread of the virus, it is questionable if they can control their situation early. The pandemic in Europe, particularly in Italy and Spain, is spiraling out of control.

China’s industrial production in January and February combined fell 13.5 percent on-year, the worst decline in 30 years. Retail sales fell 20.5 percent and exports went down 17.2 percent. The Korean economy, which depends heavily on China, cannot but suffer a tremendous negative impact.

“Coronavirus crisis” is quite different by nature from past financial crises caused by short-term shortages of liquidity. The global economy faces a crisis that every country must endure on its own. Weak countries will fall earlier than stronger ones.

If it is difficult to end the pandemic early, and the crisis is likely to deepen until vaccines or effective treatment are developed, an array of available measures needs to be adjusted to the dire circumstances.

Low-income groups, small business owners and employees and the self-employed are worried about the looming likelihood of earning less, losing jobs or going out of business. The tourism industry is on the brink of death, while airlines are in financial straits.

With production, consumption and exports crumbling, companies will certainly face greater and greater difficulties as time goes by.

Probably out of concerns over this grave situation, President Moon Jae-in called for unprecedented measures in a Cabinet meeting Tuesday. He said that an extra budget is not the end but the beginning.

But the 512 trillion won ($414 billion) government budget for this year is already super large, and an 11.7 trillion-won extra budget has been drawn up to cope with the coronavirus crisis.

The main budget alone represents a heavy burden on the people. Add to this the secondary and tertiary extra budgets, and debt owed by the people will only snowball.

Late last year, rival parties passed this year’s government budget without screening it as carefully as usual, as they were preoccupied with controversial bills to revise election rules and create an agency under the president to investigate senior public officials.

When they passed the largest-ever 2020 budget last year, neither the government nor the National Assembly could anticipate the outbreak of the novel coronavirus. Considering the unexampled economic shock caused by the virus, they would do well to review the budget drawn up before the virus crisis and readjust items.

Fiscal support is necessary to help individuals and companies survive the worst situation. But first-aid cash assistance must not be all about the government’s emergency measures. Fiscal and monetary policies will turn out useless without revamping policies from square one.

Tax systems must be changed and the labor market reformed in the direction of reviving corporate investment. Government intervention in the private sector must also be reduced. Without these accompanying changes, helicopter money will likely just go down the drain.