The jury is out on this and it is very hard to see what is going to happen. I can’t give you a number, I’m afraid. But, what’s important, is that this is not a question about how economic activity is falling right now, but how long the downturn will be.
«It is important to take firm action early on»
In 2003, when SARS hit Asia, growth was very weak in the second quarter but accelerated strongly in the third quarter. On average for the two quarters, it did not look like there had been a sharp downturn.
If we get a long, drawn-out episode, the problems will accumulate and become very substantial. Therefore, it is so important to take firm action early on.
Did China react properly then?
China basically closed down the economy once they realized the severity of the problem and now, six weeks later, the country is coming back.
I think the problem is now relatively small in China. I’m more concerned about the impact on the U.S., where I think the authorities have really underestimated the severity of the problem and it may therefore continue for some time.
If the crisis proves short-lived, most companies can survive?
A short-lived crisis is not such a big issue – it would be similar to a long summer vacation, when manufacturers close down their factories and economic activity falls sharply. But the longer it lasts, the bigger the risk of a discontinuity. One bad month is bad, two are worse, but three may mean bankruptcy for a small company. And that means you get permanent extra costs for the economy. Therefore, packages such as the one presented by the German government over the weekend that aim to support small firms are essential.
«The Swiss government has deep pockets»
Central banks can create a supportive backdrop to the real economy, and financial regulators can reduce capital requirements so that banks can lend more. But central banks are background players and will not solve the crisis.
How do you assess the Swiss government’s response so far? Will the money pledged suffice or will we need more?
Hard to say. If it is not enough, the Swiss government can come up with more money. It has deep pockets. Switzerland and Germany are not the problem, but the situation in Italy and some other countries may very well become very problematic from an economic point of view.
The problem are countries where a spending package may make public debt levels unsustainable. A combination of a massive increase in government spending, a collapse in tax collection and a surge in public debt may tip such countries into very serious difficulties.
And this could lead to a major problem for the Eurozone?
