We can distinguish three stages in any economic
crisis: the core of the problem, the mechanism
of propagation and magnification, and the
answers to the crisis.
Let’s compare 2008 crisis versus Covid-19
crisis
The core of the problem is very different.
In 2008 the core of the problem was the collapse
of the financial system. Or in countries like
Spain it was the collapse of the construction
sector. The Covid-19 crisis was due to a health
problem, a pandemic. Consequently, part of
the economic activity had to stop.
The mechanism of propagation and magnification
is quite similar. Companies directly affected
by the crisis cannot produce and does not
receive revenues. Then, some liquidity problems
arise: companies cannot pay banks and other
companies. Consequently, companies have to
fire workers and unemployment increases. This
generates pessimism about the future economic
situation and reduces new investments.
Moreover, there is an addition magnification
mechanism in the current crisis. There exists
a huge interdependence among companies, not
only national companies but also international
companies. If one company cannot produce due
to the pandemic, this affects other companies
from the same production line due to the scarcity
to inputs or intermediate goods.
Concerning the answers to the crisis, it is
too early to compare both crises because,
unfortunately, Covid-19 crisis in not over.
In 2008 some countries like Spain applied
expansionary fiscal policies (that is, more
public spending). This increased the public
debt/GDP ratio and generated a public debt
crisis. In May 2010 the European Council (the
leaders of the EU countries) decided to carry
out rescue operations. Some countries (Greece,
Ireland, Portugal, Spain, and Cyprus) received
loans under conditions set. For the current
crisis is very important to reduce uncertainty.
To do that, governments have to communicate
policy intentions conditional on pandemic
dynamics. The European Council has agreed
on a package of €750bn to help countries’
economies recovery. Countries that receive
the funds have to fulfill some conditions
that will be monitored by the European Commission.
