Episode #5: International Public Policy and the EU Perspective (Matt Oresman)

Joel Simon: Matt, I have to tell you I’m really looking forward to our conversation today. You are our first guest with a European perspective on what’s happening around the globe. Maybe you can start us off by giving us the state of plan, major stimulus and response effort so far.

Matt Oresman: Sure, and I’m very happy to do that, Joel. What I’d like to do with that question is compare and contrast what we’re seeing between the United States, UK and Europe—three similarly situated Western governments with more infrastructure in place for stimulus programs and supporting rescue efforts. The U.S., as we’ve seen—and as I think previous guests have discussed—really focuses on the CARES Act. That’s the major U.S. stimulus initiative that brings together several different loan programs, stimulus programs for businesses large and small. And then there’s a huge amount of debt support for the debt market. This is everything from buying essentially junk bonds on the primary and secondary markets to keep things afloat to supporting union market and supporting buying assets from lenders who want to unload these riskier assets so they can then have more capital to lend out. It’s a pretty broad brush approach in different sectors at different sizes of companies, including the checks that are going right to people to support unemployment issues or stimulate spending. Now I want to compare that to the UK system. The UK process has not been as much money by any means—the size of the economies underscore that. But the process is a lot easier. The primary one is what’s been known as a “furloughing.” It’s a term I’ve never really used in the UK, though we’re familiar with it in the West. Essentially what that’s allowing companies to do that don’t have a reason to keep employees around during the shutdown is to let them go and give them 80% of the salary, and then 80% of that is reimbursed by the UK government. It’s a very simple process, very simple paperwork, and it has allowed companies to front money to the employees who have been temporarily laid off, and on the other hand, get that money back easily from the UK government. Also, it shows a little bit of difference in our systems because obviously one major concern is U.S. health care cost, where in the UK, because of the National Health Service and public health care, those who have been laid off don’t have that concern. So really, it’s giving them enough funds to pay their rent, pay their mortgages, buy food and sort of hover until reopening. There also have been low-interest for small-sized business, as well as very good loan programs for some large companies, similar to the U.S. where the government is buying commercial payroll loans.

Simon: That brings us to the EU …

Oresman: The EU program is probably in economic terms on par with what the U.S. is doing, though it’s a toss-up on whether it is as efficient. Some things are just being done at the EU level, some things are being done at the nation-state level (France, Germany, Spain, Czech Republic or otherwise), and a number of things are being done by the European Central Bank in a coordinated way similar to what the Fed is doing.

Similar to the Fed program, the ECB has a lot more firepower at its disposal than the sort of normal budgets and treasuries of the EU and the separate nations. So the ECB announces the rolling out of more liquidity-keeping interest rates well into negative territory for banks that lend in all the different countries, loosening up liquidity rules, change to asset purchases—really pumping money into the EU system, or at least making money available to keep the economies afloat. Parallel, the EU has pumped about $3.4, $3.5 trillion into a whole post program. Some of these are done through nation-states, where you have back stopping loan programs like what you see in the UK. There’s $600 billion in fiscal stimulus coming as well, and this is money that can be essentially transferred down from the EU to the nation-states to draw on and spend. Now one of the big debates here in Europe and you may have seen it around so-called “Corona Bomb.” This was an instrument that a lot of post-affected European countries, particularly those in southern Europe who really had to shut down, ones like Italy and Spain, want to issue—a 10-year European bond with the proceeds to be used for stimulus and for recovery. The northern European states like Germany and Denmark and the Netherlands, they are against it. They don’t want their citizens to basically pay for the bonds. That would benefit the south. So instead, they are using an internal European mechanism of low-interest loans, similar to what the Greek bailout was. This is an evolving story; we’ll see how this plays out. There is more and more money coming out of the EU as time passes, but there’s a big debate in how to make sure it gets to those in need as opposed to those who contributed those funds. There is a much greater need in southern Europe.

Simon: It’s interesting seeing the variety of responses and the treatment of different constituencies. Could you talk about a specific European initiative? In particular, I’d be interested to hear about the EU Green Deal, which had a lot of momentum earlier in the year, but seems to have hit a giant snag when COVID-19 hit.

Oresman: Exactly. The new EU commission that came in at the start of the year made their signature program over the next five years the so-called “EU Green Deal.” This was really putting a lot of money and time, bureaucracy and effort policy into hitting an EU target of being carbon neutral by 2050. This program would basically drive a trillion dollars’ worth of spending on green initiatives in Europe. In reality, it’s probably a couple hundred billion of pure EU money and the rest through various instruments and incentives, but it’s serious money. It was designed so that every policy choice made, every expenditure the EU focused on, would have to take carbon out of the EU. And this was really groundbreaking. This was the first major treaty law of a group of nations, or semi-sovereign entities to do this—way ahead of where the U.S. is, way ahead of most. I think the strategic thinkers realized there is a chance for EU to actually have something it could lean on and create products, goods and policies that could be sold and marketed around the world as other countries accept the need to decarbonize. All this was gearing up just as COVID-19 hit, so things are kind of stuck in the mud in terms of what this means for policy. One of the challenges and one of the things we’re hearing a lot of is this so-called “build back better.” As money is made available to address the impact of COVID-19 and restimulate the economy, there’s a big push among thinkers and policymakers to figure out how we can use the money in such a way that kills two birds with one stone. Rebuild the economy but at the same time start driving everything in the direction of decarbonization. The first big task is going to come when the EU does its budget, which is really going to be the budget for stimulus and pandemic response. If this has various green issues baked into it, I think that will mean things are back on track, but there is of course a push to water it down, particularly from the countries that have industries that are not green, but they need the comeback. You’ll see this fight in agriculture, coal, oil-producing countries—even the aviation situation is on the table.

Simon: It will be interesting to see if there’s any positive effect on the environment because I know that emissions are down all over the world as a result of shutdowns and slowdowns in the economy.

Oresman: There actually was an article that came out talking about how we’re seeing a higher spike in cases of COVID-19 in cities where they have really bad air quality. That’s having an impact on people’s pulmonary function, so you’re really seeing this interlinking of environment and pandemic response, causes and effects.

That said, this is going to put a huge damper in emerging market investments, particularly in Africa, where investors are going to be very uncertain at this moment whether COVID-19 will shut down the economies for a chunk of time and for how long. There are too many unknowns, particularly if you’re looking at a project that requires a large labor force or close quarters operation—say manufacturing or mining industries—or a single supply chain where one outbreak comes to a problem like agriculture. It’s also having an impact on tourism, obviously. Many of these emerging economies—Africa, Latin America, Southeast Asia and elsewhere—huge amounts of their GDP are tied to tourism, 10 percent in many cases, even higher in others. The pandemic has shut down air travel, shut down hotels and restaurants, and that is going to have a huge impact on the economy. These are big questions. I’m personally working on an interesting project around sustaining tourism. As things build back, how do we ensure that tourism gets more money so we can stay resilient? At the macro level, we are looking at some countries where 10 to 20 percent of GDP is going to be wiped out of the equation at least for the next year, so that just puts much more pressure on other sectors that are already depressed. It really isn’t much of an economic rug anymore.

So, tricky times if you’re in emerging markets, but a fair amount of emerging markets are really hoping that the Western countries, those that have the resources, don’t just fight their own problems and move on and forget about everybody else, and that those global financial resources are made available to everybody to make sure that everybody around is not permanently affected by the pandemic, but regain economic strength.

Simon: Those are great points, Matt, and thanks for that whirlwind tour around the globe. It’s been great speaking with you today.

Oresman: My pleasure. Thank you for having me.