COVID-19 and the Global Economic Outlook for Europe, the Middle East, and Africa

Madhav Rajan:              00:00:29          Good afternoon ladies and gentlemen. Welcome to Chicago Booths virtual Economic Outlook 2020. My name is Madhav Rajan. I'm the dean and the George Shultz Professor of Accounting at the University of Chicago Booth School of Business. I hope all of you are doing well and are safe in this uncertain time. It's amazing to see such a great turnout today for Economic Outlook. I thank you all for attending today's event, and for engaging with the school in this manner.

Madhav Rajan:              00:00:59          Chicago Booth has a lot long tradition of informing public disclosure, through platforms such as Economic Outlook, which started back in 1954, through our initiative on global markets, as well as our Chicago Booth Review publication. Economic Outlook provides a forum for our pathbreaking thought leaders to confront the future, evaluate emerging trends, and share insights that help reframe our understanding of the world to come. The Chicago Booth virtual Economic Outlook series launched in late April, in Chicago, where 6300 members of the booth community logged in for the event.

Madhav Rajan:              00:01:37          Last week we hosted a virtual Economic Outlook in Hong Kong, focusing on the economy in Asia, and over 730 people logged in, which was fantastic. We have an excellent program today with three very distinguished panelists and a great moderator. And they're going to share the insights on COVID-19 and the global Economic Outlook for Europe, the Middle East and Africa. So let me introduce the three panelists that we have today. So first we have Veronica Guerrieri, the Ronald Tarrson Professor of Economics and the Willard Graham Faculty Scholar at Chicago Booth.

Madhav Rajan:              00:02:12          Veronica studies macroeconomics, labor and financial market frictions, search theory, pandemic contracting and growth theory. She has been a research associate at the National Bureau of Economic Research since 2013, and a consultant at the Federal Reserve Bank of Chicago, since 2014. Randall Kroszner is deputy Dean for executive programs and the Norman Bobins Professor of Economics at Chicago Booth. Randall served as a governor of the Federal Reserve System from 2006 until 2009. He chaired the Committee on Supervision and Regulation of Banking Institutions, and the Committee on Consumer and Community Affairs.

Madhav Rajan:              00:02:51          Randall took a leading role in developing responses to the financial crisis, and undertaking initiatives to improve consumer protection and disclosure. Our third panelist is Brent Neiman, who's the Edward Eagle Brown Professor of Economics, and the William Ladany Faculty Scholar at Chicago Booth. Brent served as the staff economist for International Finance on the White House Council of Economic Advisers. He conducts research on international macro economics and trade, and serves as the director of the initiative on International Economics, at the Becker Friedman Institute.

Madhav Rajan:              00:03:25          We're thrilled here today to have Henry Curr as the moderator. Henry is economics editor of The Economist, where he is the principal lead writer on economics, and overseas economic coverage throughout the newspaper. My thanks to Henry for moderating the event. And with that, I'll let him do take it away. Thank you.

Henry Curr:                  00:03:44          Thank you very much for that introduction Madhav. I'm delighted to be moderating this panel at this extraordinary time for the global economy. Before we get going, I've got a bit of housekeeping to do. So, we're going to have four people speaking on the call today, but we're hoping that it will be an interactive session. So if you want to ask a question, please type it into the Q&A box, and we'll have questions from the audience as we go through the session put to the panelists. If you have any issues with the audio, you can always dial in by telephone.

Henry Curr:                  00:04:19          We have an hour here before we wrap up. And finally, this session is being recorded. It's being recorded and will be made available on the Chicago Booth web page afterwards. And with that, let's get started. So where I'd like to begin is on a subject that is in the news around the world at the moment. Which is monetary policy. We were just saying before the call that Jay Powell is speaking at 2 PM in America, he kindly scheduled his remarks not to clash with this session. But here in Europe, monetary policy has been in the news because of the controversy regarding the ECB decision and the ruling by the German Constitutional Court regarding that.

Henry Curr:                  00:05:04          So I thought Randy, perhaps we could start with you for your thoughts on monetary policy in the current environment as a former monetary policy maker yourself, of course. What do you see as the role for monetary policy in this crisis, and how is your [inaudible 00:05:18]?

Randall S. Kroszner:      00:05:20          So, thank you very much for that, because I think that's a very, very important issue. And I think people are focusing a lot on what central banks are doing. And I think central banks have done a lot and there's probably more that they can do and undoubtedly will do. The challenges that we've got the shock, which is very different than the shock that happened when I was at the Fed a decade ago, when really the origin of the problems were in the financial system itself. Here the shock obviously is from outside of that. It's the virus and then the policy responses that have led to an effective shutdown of production and of consumption.

Randall S. Kroszner:      00:06:02          So, central banks have responded by trying to provide liquidity to the system, reduce interest rates and I think do that proactively. And I think that's been extremely important to provide proper functioning for the markets. But I think one of the challenges is that, many market participants and people think that somehow the central banks can cure the virus, and there's no way they can do that. Central banks can't repair broken supply chains, central banks can't get people to consume if they're on lock down at home and they are scared about going out,

Randall S. Kroszner:      00:06:40          Central banks can't get people back to the office and work. They can try to provide incentives, they can try to provide low cost sources of funding for companies to soften the blow, but they themselves can't do that. And this is going to be a particular challenge here in New York. Because of that German High Court decision, basically challenging the ECBs authority to undertake asset purchases, which is a very important part of what they've done before and what they're doing now. My understanding is what the court said is, well, they need to do a proportionality analysis.

Randall S. Kroszner:      00:07:18          My understanding is that, it says that they have to explain how this might affect every possible asset class, how it might affect employment, unemployment, whether there are unintended consequences. That's a wonderful and important academic exercise, but this is current policy where central banks have to be responding. This is also a fundamental challenge to the independence of the ECB. It's a bit ironic that the Germans were so [inaudible 00:07:51] on I think, and I would agree that to make the ECB independent.

Randall S. Kroszner:      00:07:56          But now of course, if each country's court can and say, "Well, we don't really like what they're doing after [inaudible 00:08:01] we don't explanation. They can't do this." That's a problem. And that's going to raise questions about how active the ECB can be responding to the challenges. And those challenges are only going to be getting greater. I don't think they're going to be getting [inaudible 00:08:16].

Henry Curr:                  00:08:18          Of course the appropriate monetary policy response in this environment depends as you say, on the nature of the shock. We've had a demand shock, we've had a supply shock as well. One of the questions we've had from the audience is whether we're facing more of a demand or a supply shock at the moment, which has been destroyed more. Veronica, I think that might be one for you.

Veronica Guerrieri:      00:08:41          Yes. Thank you. So my way of thinking about the shock is that for sure it's a first, a shock that hits the supply side of the economy in a more direct way because first the people are scared about going to consume. So even before the lock down, people were not going to restaurants, were not going on vacation just because they were scared of the spreading of the virus. Then with the lockdown and the policy that have been implemented of course, this has been becoming even more extreme. So, complete sectors have shut down and production disappears.

Veronica Guerrieri:      00:09:18          So clearly this is a supply shock. But the question is now, what is the origin of the shock or how the shock manifest itself in its first place, but what are the main ... In which way the shock propagate to the economy? And the question is, are there demand effects coming from the supply type of shock that can dominate the supply nature of the shock itself and this is important for monetary policy and for fiscal policy because, if the shock was fundamentally supply shock, standard supply shock, then probably it would not be necessary to stimulate the economy.

Veronica Guerrieri:      00:09:51          But what I show in some work that I’ve recently done is that actually it may be that the way in which they shock propagate to demand, is going to be even stronger. So the demand side effect is going to be even stronger than the original supply shock. And so the demand shortages that is going to spread out to the sectors that have not locked down yet or that are still alive, is going to be stronger. This is because some goods that are produced in other sectors may be substitute, some may be complements. And so people may decide, if there is no possibility to go in vacation anymore, I'm not going to buy new cars.

Veronica Guerrieri:      00:10:28          And also because they are incomplete markets, so people lose their income, workers in sectors that are shut down lose the income and if our financial constraints are to their availability to access some lending, then they're going to stop consuming. So once the shock becomes stronger on the demand side, definitely we need some more expansionary aggressive monetary policy and fiscal policy. And another way of looking at that is that, what does it tell us in terms of expectation above inflation for the monetary authority?

Veronica Guerrieri:      00:10:58          Well, our prediction is that, if the demand side of the shock is stronger, well, we should expect deflation. And we have seen recently that the CPI has actually been going down. So it confirmed ... The data are preliminary but there is no inflationary pressure coming from shock that is something that one would expect that this shock was mainly on the supply side. Now, it's true that there are some caveats that one has to make, because when some goods completely shut down, we don't have the price for those goods, so possibly the price for going to a restaurant without getting [inaudible 00:11:32] now would be infinity, everybody will love to do that.

Veronica Guerrieri:      00:11:35          But actually, this is the exact nature of the shock. Because when we think about the demand the fact, we want to focus on the sectors that are still open. So where is that people could consume? Are they consuming more or less? And so in a sense, exactly the fact that the price of those goods are going to go to infinity would make people actually weigh ... Is exactly a nature of the fact that we are focusing on those sector and so, even though there would be a spike in inflation for those sectors, those are not available.

Veronica Guerrieri:      00:12:07          And so we have to focus on where the demand can be stimulated.

Henry Curr:                  00:12:12          If anyone on the call is interested, I'd highly recommend Veronica's paper on this. It's fascinating and very lucidly shows how a supply shock can morph into a demand shock through the sectoral linkages. Veronica I'd just like to linger on this inflation point for a while, because, although it's fairly clear when you look at financial markets that the impact has been disinflationary, that's how policymakers are treating it for now. As you say, the data is not so good at the moment. And you do have this vocal minority of people who say, once the economy start opening up, you're going to have all this extraordinary economic stimulus run up against a still constrained economy.

Henry Curr:                  00:12:52          So I guess my question is, how confident are you in that breakdown? Or is it just a central scenario with a lot of uncertainty?

Veronica Guerrieri:      00:13:03          So, of course there is uncertainty in and I cannot make this disappear. But my view is that even when the reopening is going to happen, we're going to go to phase two, phase three, phase four. And maybe and hopefully consumption is going to be stimulated through inflation that will start going up again. But it's the shock that is disappearing. So it spikes above their regional values, just going to go back slowly, where we were. And the only concern about longer term inflation, I don't think it comes from the fact that we are going to reopen and this is going to stimulate demand.

Veronica Guerrieri:      00:13:40          That's actually good, and that's actually something that we want to see. I think the more [inaudible 00:13:45] they bring up concern about future inflation is coming from the fact that the side effect of this very aggressive fiscal policies that governments are going to put in place, may generate level of debts, both public and also private that is going up. And these public that in the future may create a concern and may generate monetary action that can generate monetization of that. And so possibly having upward pressure on inflation, this is what I would be more concerned thinking about inflation.

Veronica Guerrieri:      00:14:19          But this is more down the road is not about the shock disappearing and then reopening.

Henry Curr:                  00:14:24          Another thing we should consider when we're thinking about the nature of how economies work at the moment, is the unique circumstances of labor markets. We are working from home, large numbers of people aren't able to work at all right now. Extraordinary policy support in place for labor markets. Brent, how do you think about how labor markets are performing right now? And what determines their success or lack of success?

Brent Neiman:              00:14:54          Well, it's hard to get a good snapshot in real time of exactly how labor markets all around the world are working now, as a start in research together with a Booth colleague, Jonathan Dingel, we tried to think about what might be driving that initial supply shock that got things going in the work for instance that Veronica was just talking. And the way we tried to do that was estimate before the crisis started, how many jobs could potentially have been done entirely from home? It was a question that kept coming up in conversations among colleagues and with policymakers on what the future might hold, looking ahead at the COVID crisis.

Brent Neiman:              00:15:38          And I don't think we had a very good answer. So Jonathan and I classified jobs using this survey called ... Well, surveys administered by a group called the O*NET in the United States, which is funded and works in collaboration with the Department of Labor, and it gives details and characterize various occupations, almost 1000 different occupations. It tells you whether those occupations involve running, operating heavy machinery, things like that. And so based on those survey responses, we characterized what percentage of jobs by country, by industry, by city in the United States, could be done entirely from home.

Brent Neiman:              00:16:23          And there's three things that I think we took from that, that I think are important to think about as this crisis unfolds. First is just to get a sense of the scale of things. We found that 37% of all US jobs could be done from home. Going into the project, we weren't sure if it would be a majority, if it would be a very, very small minority. We're to think of it as almost 40% can be done from home, but that means that most, about 60% can't be done from home. So that's the first thing to think about. Necessarily a lot of labor output, a lot of labor production could not happen when the country was restricting people's access to their workplaces.

Brent Neiman:              00:17:06          That might have been the right thing to do. I was generally supportive of the view that the public health crisis should be taken into account first and foremost, but it is important to think about how deeply this affected production of labor and that gives you a scale. The second thing it told us is that, there's a huge inequality, a big difference in who is impacted by this shock. So even though 37% of jobs can be done from home, they actually account for 46% of all US wages. And underlying that, you can see very clearly the pattern in our data that higher wage professions are more likely to be able to be done from home.

Brent Neiman:              00:17:48          Think of finance insurance, lower wage professions typically can't. And so whether that means that the jobs that are most at risk are those of lower wage earners, who presumably have less of a buffer stock of saving and less capability to handle a period without income, or whether it means that in fact, it's lower wage workers that are going to be the ones that have to face risks by going out and continuing their job out exposed in the public, it gave an initial flavor of how unevenly, the burden of this crisis at least so far, appears to be hitting society.

Brent Neiman:              00:18:27          Lastly, an extension of that inequality point. We look across countries. And there you find a striking pattern where the richest country in our data set is Luxembourg. That's the one country in our data set where most jobs can be done from home. A lot of the poorer countries, very, very few jobs can be done from home. It's quite intuitive. In part you can imagine that a lot of those countries don't even have the broadband infrastructure to facilitate working from home, and the relationship was very strong where intermediate countries had an intermediate ability to have their jobs performed from home.

Brent Neiman:              00:19:08          A country like Mexico had closer to 22%, I believe, of its jobs that could be done from home. And so, the last thing we took from that initial work was that, thinking about what this crisis will look like internationally, you might see very big disparities in the ability to continue production with workers at home and unfortunately, it's going to be most difficult for the poorest of nations.

Henry Curr:                  00:19:37          It strikes me that puts policymakers in a really difficult position. A lot of them across the rich world have put in place these extraordinary support schemes, and a lot of countries are now asking, how can we unwind those schemes? Which are essentially, in certainly in Britain and large parts of Europe, are essentially paying workers who have been furloughed, who are not currently working. And so as you think about how you reopen your economy, you've got to have a scheme for getting those people back to work.

Henry Curr:                  00:20:10          But as you say, lots of jobs cannot be done from home. And the conditions in the workplace may not be safe. So, so long as you're enforcing lock downs or anything like it in any sector, you have to provide support to the workers. So it seems to me that there's something of a trade off there for policymakers. Randy, I'd be really interested to know how what your take on that would be, on how we should design labor markets or programs or indeed amend the ones that are in place already.

Randall S. Kroszner:      00:20:38          Sure. So I think a lot of the policies, whether it's the central bank policies, but particularly the fiscal policies, have been around trying to preserve jobs and preserve jobs at particular organizations. So a lot of the schemes like the schemes in the UK and in the Europe as well as in the US, a lot of it has been providing either grants or very low cost loans or loans that can turn into grants, if small size as well as large enterprise don't fire their workers, if they bring the workers back. The challenge is that I think this shock is a really fundamental shock to the way consumption will occur and production will occur going forward.

Randall S. Kroszner:      00:21:26          I was at the Fed during the global financial crisis, and I was also working in the White House when 9/11 happened. When 9/11 happened obviously we closed down the transportation system, a lot of people were very concerned about traveling, but when it was reopened, we said we believe the system is safe and you can travel on it. And that if you want to be patriotic, go back out to the shopping malls, don't change your lifestyle. The message here has been dramatically different, and I think people have taken that on board and are going to continue to operate that way, even as things slowly unlock.

Randall S. Kroszner:      00:22:05          And so, I think what that means is that we have to pivot policy away from preserving the past to try to facilitate a move to the future. Basically, I think of it as the meteor has struck the US, the dinosaurs are going to become extinct, and no amount of policy can bring those dinosaurs back or keep them alive. We have to accept that things are going to have to move forward. And that doesn't mean that you don't provide support for workers. But it's a different approach rather than trying to preserve the job in the organizations they were in, you to try to provide the support to the worker.

Randall S. Kroszner:      00:22:48          And so for example, I think we need to move in that direction because, we wouldn’t be able to just go back to the way things were in February or March, and we can do that through providing support to individuals, for example, in the way some schemes work, you have to go to the unemployment office each week or each month to say you've been looking for a job and then you get your resources and get those just locally. That doesn't make sense when you want to allow people to be able to move or be able to retrain. And so maybe what you should do is have something that I proposed during ... And we had proposed to [inaudible 00:23:32] accounts of Economic Advisers back during 9/11, a personal reemployment account.

Randall S. Kroszner:      00:23:39          So you look at the expected amount that you're going to be paying to an unemployed worker over let's say, a two or three month period. Give that money up front in an account, and don't make that tide distinct somewhere locally. If the jobs are in Luxembourg, or if the jobs are elsewhere, or if someone need to retrain, if someone needs to pay for childcare, use those resources for that, to allow the person to make the transition. And I think that's something that's ... It's I think, a much better way to use resources to try to support to the individual workers and their families, as well as to get the incentives right for them to be able to move on, rather than try to preserve a world that just can't be preserved.

Randall S. Kroszner:      00:24:29          The dinosaurs will be extinct. And there's no amount of resources that we'll be able to bring them back.

Henry Curr:                  00:24:35          We had an interesting question from the audience here saying, can you compare and contrast the differences in labor market mobility in the US and Europe, and whether those differences may impact the speed of the recovery? If what you say is true, and there needs to be some labor market reallocation going on here. Do you think that puts Europe in a worse position than America?

Randall S. Kroszner:      00:25:00          I think greater labor mobility is a very much a plus, and I think you can see in the recovery from the global financial crisis, a faster recovery in the US. There are a lot of different reasons for that, but in part that is part of it. It's also interesting if you think about these personal reemployment accounts, if those are all being given by the national government or the local or given locally, then it's harder for people to move across state lines or country lines. In the US, if you break down some of these barriers, it's easier for them to move across state lines.

Randall S. Kroszner:      00:25:39          And of course, some of our states are very big. So I think thinking about the situation you're in, thinking about Europe in particular, and thinking about well, is there something that would be European wide to allow for easier reallocation? That's something that I think will be helpful in the intermediate to longer run for recovery.

Veronica Guerrieri:      00:26:00          Can I say a word on that discussion? I totally agree with Randy that the current epidemic may represent a moment of technological progress that is going to generate a restructuring in the economy even in a positive sense for the future. However I can see also an argument in favor of helping workers attached to their jobs. And this is more for some sectors of course, more than other sectors that we believe are going to be less affected by this restructuring. I think there is an important consideration it is hard to find a good match for a firm or worker.

Veronica Guerrieri:      00:26:47          And there is a lot of training on the job and human capital accumulation that would be lost if workers are just left outside the job and then the firm when things reopen [inaudible 00:27:01], they'll go through the whole process of re finding the right workers and retraining them and re providing them with the right human capital. So, of course there is a trade off here. So I see arguments in favor also of helping workers on to stay attached to their job, and although I see the problem that this can constitute a drag to a natural restructuring of the economy, that it may be positive for the future.

Veronica Guerrieri:      00:27:29          So that's also though I'm a little bit less negative on Europe because for the short run, these are instruments of helping sectors to reopen when they have their workers already in place, it's going to help them recovering faster and the Europe provision is a more sclerotic labor market, there's a bunch of these kind of instruments already in place. For example, Italy discussing the [inaudible 00:27:55] which is well designed ... As is a negative effects, but in term if the objective is to keep the workers in firm so that the RF travel temporarily it is well designed.

Veronica Guerrieri:      00:28:07          While we know that it's hard to design policy like that, as we have seen from the payroll protection program in the US, because the risk is that you try to help firms to retain their workers, and then you end up helping firms that would have retained their workers anyway, and they actually didn't need the help. So in that sense I think that maybe Europe and [inaudible 00:28:26] institutions like that can have some advantage in the short term. Now, in the long run I agree then this is going to ... It depends on how strong this restructuring is going to be. And making the right thing probably would be to think more cover which sectors we're talking about.

Veronica Guerrieri:      00:28:44          And for some jobs, some kinds of jobs, some sectors may be helpful to put programs like that in place for others, instead, it's better to leave the economy going in this direction.

Brent Neiman:              00:28:56          But let me just jump in with a couple of quick thoughts on this topic, but one is, I think the sectoral dimension, the heterogeneity across sectors really is huge. In the sense of, for instance, if you look at the restaurant sector in the US and you ask what's the typical duration of a job match between a waiter for example in a restaurant, or some of the hotel jobs in travel and entertainment industries? It's actually very, very short. So short that it's hard to believe that there's tremendous match specific capital that's critical to preserve.

Brent Neiman:              00:29:33          On the other hand, and manufacturing other industries, it's quite easy to imagine that's really important. So differences in importance of those kinds of sectors and their composition across countries, I think will probably manifest and how much is lost when these matches are inevitably broken. The second thing that quickly note is, I agree with Randy that given the scale of this shock and how it implies different technology is likely to be important to employ going forward. There's been a lot of very natural talk about firms trying to produce in a more capital intensive way, substituting towards capital away from labor for example.

Brent Neiman:              00:30:11          But I do think, at least in the short run, there's a couple of important impediments to that. One is usually that requires a large capital outlay to the extent that's the structural change and transformation we're talking about. It's hard at a time when a lot of firms are constrained. Second of all, a lot of times the actual guts behind that is installation of imported capital machinery and capital goods, a lot of which, for example, is made in parts of the world where the supply chain is already muddy, for lack of a better word.

Brent Neiman:              00:30:45          And so, I do think that you have a bit of a tug of war between a lot of these forces on the one hand the incentive to change the way in which production occurs, surely is quite high. On the other hand, the mechanism to bring about that change, is certainly going to be dampened by some of these real world constraints that at least in the short run can be quite powerful.

Henry Curr:                  00:31:05          We're getting a lot of-

Randall S. Kroszner:      00:31:07          Sorry. Unfortunately, that's why it makes me pessimistic, I'm usually pretty optimistic. But it makes me pessimistic in the intermediate run. Because I think we just saw a report today in Europe about how investment has just cratered. I think you're exactly right. We're not going to be seeing a lot of investment. But I think you need that investment in order to come back. We're not seeing it. I think that central banks are trying to provide as much support as possible for that to occur. But given the uncertainties, given the difficulties of making that transition, I think we're just freezing for now.

Randall S. Kroszner:      00:31:43          And that's going to make the short run negative impact I think, even more intense. And also, I think we'll take a very big hit to productivity. Sorry, Henry.

Henry Curr:                  00:31:56          No, no problem at all. I was going to say that we're getting a lot of questions about another type of structural change that might come out of this crisis, with regard to trade and supply change, which Brent mentioned briefly there, whether lots of manufacturing is going to be reassured as part of the structural change after the crisis, what the implications will be for multinationals, and what the implications will be for the trade war. Brent, I know this is a subject that interests you, I wonder if you could talk a little bit more about those issues.

Brent Neiman:              00:32:28          Yeah, so we had a trade collapse in the previous global financial crisis from 2008 to 2009. And what we saw then was again relative to total economic activity, a cratering of trade, driven largely by the decline in demand for durable goods for investment goods, which was natural as part of that recession and durable goods and investment goods are the most heavily traded goods and so, typically in a recession, where there's a freezing of spending on investment, you would expect to see a collapse in the value of trade, and I think certainly we're seeing some of that now.

Brent Neiman:              00:33:09          There's additional and perhaps longer term shocks though that are coming along that are accompanying the COVID crisis when it comes to international trade. One is that, we're actually seeing in many dimensions an increase in the cost of doing trade. So, oil prices have come down. On the other hand, some good shipments occur in the underbelly along with passenger travel. And certainly we're seeing substantially less even passenger travel around the world and that's likely to continue I would imagine, for a while. Furthermore, some softer things that we know lead to trade relationships.

Brent Neiman:              00:33:49          Being able to go to a foreign supplier and decide to source from them, decide to have longer term relationships which lead to import export ties. It seems plausible that we're entering into a world in which these relationships are harder to form. The final thing which is actually a major difference is that, the protectionist sentiment that we saw on the rise over the last five years let's say, in fact predates the COVID prices, and we did not enter the 2008-2009 trade collapse and global financial crisis with a similar environment.

Brent Neiman:              00:34:28          Here, we had the US trade war with China, which started several years earlier, now that some countries like the United States have seen their domestic supply of medical goods potentially inadequate, countries have put on export restrictions, the US has talked about export restrictions. And so I think the prospects of entering a world in which these barriers to trade exacerbate what would already be a very negative shock to international trade and supply chains, coupled with the fact that things that are complimentary to doing international trade, like traveling, is likely to remain subdued for quite some time.

Brent Neiman:              00:35:13          I think there really is a scenario where trade stays even in the medium term, even after we've gotten past this initial public health crisis and the economy stabilizes. I think there's a scenario where we see a lot less trade.

Henry Curr:                  00:35:28          Veronica, do you think the trade channel of propagation for this crisis is important? Is that something you think about when characterizing the nature of what the economy is going through right now?

Veronica Guerrieri:      00:35:41          Yes, absolutely. So I've talked about the fact of demand of the supply shock and this is clearly and trade is very important that in more general supply chains are important for that. And so we have talked a lot about China at the beginning of the COVID-19 pandemic, when it started in China, we were talking a lot about well, they're going to see a reduction in the supply of intermediate goods for the US industry, this is going to be a negative shock for the US. But there is another direction of the supply chain that is important.

Veronica Guerrieri:      00:36:20          And now that has the epidemics, the pandemic has been spreading it all over, which is, sectors that are closing up or where demand in goods from other sectors that may be still open. And so this is actually a big and larger amplifying factor of this demand effects for the sectors that is important to consider. And this is true within a country that [inaudible 00:36:48] and they trade across [inaudible 00:36:50] so there are countries that have been hit by the epidemics earlier than others. There are differences in the lockdown policies that government have put in place and these of course has effect the important effect for the trade of intermediate goods that are going to affect industries entirely in countries.

Veronica Guerrieri:      00:37:11          And so, the natural policy recommendation that comes out from these considerations within a country and across country is that, in optimal fiscal policy will require insurance. So now, this is a little easier within a country, insure workers across sectors, as we have talked about different types of policies in the labor market [inaudible 00:37:36] in one way or the other attached to the job or not attached to a job but workers that have been particularly hit, because their sectors has been locked down. So, these type of policies are easier within a country, they're more difficult when [inaudible 00:37:52] across [inaudible 00:37:53] if, for example, let's talk about Europe for a second.

Veronica Guerrieri:      00:37:58          In Europe, there is something that could go in that direction, because there is clearly a high level of trade across European countries in there is the European Union that could create some steps in this direction with the help of the ECB. Naturally, we have seen that this has been proven hard, previously with the sovereign debt crisis, and now there are clearly tensions coming out from that, but the natural way of thinking about that is that insurance now is particularly important. So I see that as an important stat that another important challenge that Europe is facing, and what is going to come out from that.

Veronica Guerrieri:      00:38:44          I think that either Europe is going to strengthen the fiscal component of their union, or there could be another backlash, another crisis of the European system because of these linkages across countries [inaudible 00:38:59] I hope that the first thing is what is [inaudible 00:39:03] and that tensions [inaudible 00:39:05].

Brent Neiman:              00:39:09          Sorry, go ahead Henry.

Henry Curr:                  00:39:10          No, I was just going to say one of the questions we had from the audience was, will the eurozone survive this crisis? So I was going to ask if you Brent or Randy had views on that. That may not have been the question you wanted to answer.

Brent Neiman:              00:39:26          No. Randy, you want to kick it off for I go-

Randall S. Kroszner:      00:39:30          Brent, you go.

Brent Neiman:              00:39:31          No, I have. Look, I have no ... I'm unwilling to make a prediction on whether the eurozone will survive or not. What I will say is, one interesting thing we've seen over the last 10 years in essentially the run up to the crisis is that, the dollar relative to the Euro has increased its use as an international currency. So what do I mean by use as an international currency? There's a variety of things that you look for in understanding whether a currency is providing such a benefit to a country. Is it used in international shipments to invoice imports and exports? Is it used to denominate bonds that are invested in across international borders?

Brent Neiman:              00:40:20          Is it used as a share of reserves by central banks? And in the 10 years or so, from the financial crisis on, the Euro actually had been used less and less in those sorts of roles, relative to the US dollar. Why is something that remains I think, a bit uncertain at this point. It is possible that the worlds investors thinking to themselves what's the safe assets in the world entered the 2008 crisis unsure whether it was the US dollar or the euro. And if you look at the stability and extra appreciation strengthening that occurred in the US dollar during that crisis,

Brent Neiman:              00:41:05          Perhaps the proof was in the pudding and the data gave an answer that it was the dollar that in fact delivered as that safe asset. And so, this is also puzzling but interesting, because it also occurred despite the fact that many would argue the US was the center and the spark of the 2008-2009 crisis and current dollar performance is despite the fact that the COVID crisis is particularly bad right now in the US. So at least in thinking about the Euro going forward, it does look like that comparison to the dollars performance is important.

Brent Neiman:              00:41:45          And in many of the roles that surely the euros creators would have wanted the Euro to fulfill, coming into the crisis, the Euro was not an imposition of particular strength.

Randall S. Kroszner:      00:41:59          There continue to be the existential questions about the Euro, both before when Mario Draghi made his famous statements and do whatever it takes, and believe you, me it'll be enough to preserve the Euro. Obviously during his tenure has been able to do that. But just having to say that raises questions in people's mind about whether it would survive, you now have another potential existential threat with the German court decision on, will you have an independent central bank? Can the different countries just raise questions both about what the central bank is doing and perhaps others?

Randall S. Kroszner:      00:42:37          This is bigger question about the European Court of Justice versus the national courts, how you resolve disputes there. And so, we had in Europe, a European Union on the monetary side, not on the fiscal side. There was a potential here that this could be used as something where you'd have not only the monetary union, but maybe take steps towards closer fiscal union. But it's possible if it's going the other direction. And I think that raises questions. And I think that's why you don't see people running to Euro, but still people going to the US dollar.

Brent Neiman:              00:43:18          Uncertainty, Henry, plays a large role in all of these questions. And one thing I think it's novel for economists. We've been talking for the last decade a lot about policy, economic policy uncertainty. Here, a very large share, the uncertainty underlying a lot of these phenomenon is to do with the actual disease itself. We were earlier talking about trade, and I should have mentioned then that in fact, one of the key things that can inhibit a return to current or pre COVID levels of trade, would be the elimination of uncertainty. Uncertainty about whether it's worth setting up a relationship with trade partners abroad?

Brent Neiman:              00:44:03          Classically, uncertainty has been shown as one of the key drivers of the volume of trade between the US and China. There's very interesting study that looked at when China entered the WTO, it didn't actually change the tariff rates that China faced on their exports to the US. Rather, it changed the certainty with which China then knew it would be assured to have those same levels of tariffs when sending goods to the US. And this led to a big increase in trade. There's a famous study showing that similarly, you'd see these effects with uncertainty holding back the structural change that Randy and Veronica were talking about.

Brent Neiman:              00:44:43          And so, I do think for economists at least given a lot of the uncertainty is on the underlying disease and is therefore outside of our typical purview. A lot of these dynamics are going to be governed by that.

Henry Curr:                  00:44:58          Certainly true that I see a lot of economists trying to become experts in epidemiology very quickly at the moments. We're getting a lot of questions about the implication of the crisis for commodities markets. Obviously, that's very important to lots of commodities exporters, lots of emerging markets are facing a crisis right now. One of the defining features or [inaudible 00:45:22] stories of the crisis far has been what's happened to the oil price, which of course in America at least very briefly went negative. Randy, I was wondering if you could talk a little bit about how you see commodities markets right now, and what the implications of their performance is for the Economic Outlook?

Randall S. Kroszner:      00:45:43          You've had this incredible set of storms not only a big negative shock to demand, but also changes on the supply side. And so, oil prices going to unusually low levels, negative, people will always criticize central banks for bringing interest rates negative. Now we've seen oil prices actually go negative temporarily. So obviously this is not business as usual, and this means that the oil producers are going to be facing enormous fiscal challenges because they're going to be generating much less revenue than they had both because demand is lower and because prices are dramatically lower. So that's going to be an enormous problem in the, or challenge in the Middle East. It is a potential opportunity elsewhere as energy prices come down, to be able to do more manufacturing onshore that might have been too expensive to do onshore.

Randall S. Kroszner:      00:46:40          There are also challenges however, in thinking about what the implications of that are for the environment, and for climate in the US and other places many of the new energy producers whether it's Shell oil or others tended to be very highly levered, have relatively high amounts of debt, relatively low credit ratings and so, are going to get into trouble and have to be restructured. And so it'll be very interesting to see if there's some policy response and saying, "Okay, we need to restructure the sector." And so if it is to come back, it has to come back more green than it had been before. Because these issues of climate are not going away, just because we're having a financial crisis. It'll be very interesting to see how that plays out.

Randall S. Kroszner:      00:47:37          But I think with lower demand, and ... for quite some time less investment, because the uncertainty that Brent was talking about, and I think it's policy uncertainty, fundamental uncertainty, and what this world is going to look like, you're going to see commodity prices below, I think for quite some time. And that's [inaudible 00:47:58] what's real pressure on emerging markets throughout Africa and the world, and so, these countries are going to need to realize that's the new reality, I think for quite some time.

Henry Curr:                  00:48:15          It also has significant implications for the inflation outlook I presume. To what extent you think trends in commodities markets are driving that?

Veronica Guerrieri:      00:48:26          Yeah. So clearly the drop in oil prices and then in another signal that demand shortages are important in these recession ... and of course, a natural consequence of that is that prices are going down and this is exactly what I was talking about before. This is a signal that there are deflationary pressure coming from the shortages demand. Now what role this is going to play is in the dynamics of future inflation. And of course, as Brent and Randy have mentioned uncertain here plays a big role. And the uncertainty that the knowledge of the health characteristics of these virus I think is most important is about the duration of the necessity of public health policy, to help the population not to die out.

Veronica Guerrieri:      00:49:25          And so, I think that's the more challenging question of how long and prolonged this recession is going to be, and this lockdown situation is going to be in different phases and so forth. And again, I believe that at some point we are going to recover, and at that point the oil prices and other commodity prices are going to recover. As I was mentioning before, the natural pressure is going to go to go back up to the original level as long as there are no innovation as Randy was mentioning different sectors that are going to reduce more structurally, that the demand for oil prices and other commodities.

Veronica Guerrieri:      00:50:07          I think that again, this is a demand issue and that at some point the recovery is going to happen, we're going to recover, and so when the demand catch up, prices are going to go back up. And again, if not all prices, other commodity prices that are going to substitute for that if there's going to be some restructuring the economy.

Henry Curr:                  00:50:32          It strikes me that emerging markets are vulnerable in the current crisis as I suppose they would be in any widespread global demand shock, because of the simultaneous problem of their current accounts. And being so exposed to commodities prices, and this links to the dollar dominance point you were making earlier Brent. Do you have any thoughts on the position that emerging markets are in, particularly give the developments in the global financial system you were talking about over the past decade?

Brent Neiman:              00:51:05          Yeah, well, look all the kinds of policies that for instance Randy and Veronica were just talking about, take money. This feels more like a disaster relief than stimulus as I think a comparison or a comment for instance, Paul Krugman made. And typically you want to pay for disaster relief by borrowing a lot. And what's hard coming into this crisis is a lot of countries already had quite a bit of debt. You've seen a record number of countries approach the IMF asking for help, exactly the time when in principle, governments might want to build up hospital capacity, send checks to people to stay at home, and as I mentioned earlier in emerging markets, less and less people can stay at home and work and so, the problem is quite large.

Brent Neiman:              00:51:56          As I mentioned in earlier work with core authors Coppola Maggiori and Schreger, we showed that the dollars use in a lot of cross border borrowing has grown over the last let's say decade. Which means that these countries now have a debt load and potentially a larger currency mismatch issue than a lot of times historically, so that does make them potentially vulnerable if for instance, their currencies were to depreciate relative to the hard currencies in which they're doing a lot of borrowing, there's been a lot of discussion on how some governments have successfully shifted a larger share of their debt away from foreign currency and toward domestic.

Brent Neiman:              00:52:39          But corporate sectors around the world have not had as much success or have not done so as much and so that vulnerability remains. Relatedly, in our work we show interestingly that an increasing share of the bonds issued by emerging markets, increasingly when emerging markets companies access developed market capital, borrow from Americans and Europeans. They don't do so directly. They do so via offshore affiliates, for instance located in tax havens like the Cayman Islands or Guernsey as an example.

Brent Neiman:              00:53:16          And so another element of this crisis that I think is worth keeping an eye on is, once the public health crisis passes, if we are in a period in which corporate debt markets are really stressed, and we see a lot of bankruptcies and needs for government to step in and help resolve these things, the financing chains that the world uses these days might look quite different from how they looked in the not so distant past, where now multiple jurisdictions might be involved in any such resolution because you've got investors in one country, the actual bond issuer located in another country, the parent company located in yet another typically emerging market country.

Brent Neiman:              00:53:57          This element of companies either quartering or issuing through other countries, including tax havens has become increasingly interesting and potentially important. We've even seen it mentioned in the context of certain stimulus bills, some countries are discussing the possibility of excluding from the receipt of stimulus, certain countries ... Excuse me, certain companies that have headquartered in offshore places in tax havens. I think when it comes to the resolution of corporate debts, if we do get to a crisis in that market, this could play out as an important element.

Randall S. Kroszner:      00:54:38          I think that's a really big deal going forward. Because I think there's going to be an enormous amount of restructuring that's going to need to take place. Many emerging market countries are stressed at their debt levels to begin with, and this is only going to push them further. And then you've got at the corporate level, both in emerging markets as well as in Europe, as well as in the US. And so, thinking about how to have an expedited bankruptcy system, asset management companies, something where if people decide they don't want to go through what often is a very slow and painful process of renegotiation, go into something like an asset management company with ... there'll be some standardized sets of, here's what you get, here's what others get, here's what the next steps are.

Randall S. Kroszner:      00:55:31          Might be very important to think about. It's difficult for policymakers to think about that now, because everyone is still hoping for the V shape to come back. And if you start talking about this, you're talking about a longer term challenge, but I think we've got to start facing that now. In the 1930s in the US, we actually did a very large across the board debt forgiveness. There were these contract clauses that related the value of payments to the value of gold. But in the US, we went off the gold standard devalued by 69% and so people said I want $1.69. Ultimately, the government said, "No, you can't get that $1.69, you only get $1."

Randall S. Kroszner:      00:56:13          That was quite jarring to many who went to the Supreme Court. And it was a very close decision a 5-4 decision. And the dissenters said that the Constitution is gone, that we're no longer enforcing contracts. But what's interesting is that not only did equity rise in value, you could see that getting rid of the debt overhang or the debt burden but many bonds, especially bonds of firms that were lower rated and a lot more debt outstanding, actually went up in value. You might think that's crazy. How could that be because now, people are losing the chance to get that 69%. But if the debt burden had gone up by 69%, all those companies would have gone into bankruptcy.

Randall S. Kroszner:      00:56:59          The losses would have been even larger. And not only at the individual firm level, but economy wide. And so I think looking at different historical circumstances like this, seeing where it can work. Argentina did something like this back in 2001-2002, it didn't work very well. So not all that restructurings in debt forgiveness approaches work, you have to do it very, very carefully. But I think that's something that's got to be on the table and we need to start thinking about it soon.

Henry Curr:                  00:57:32          We got just a couple of minutes left. So I'm going to ask a final question, which is, we've had a couple of members of the audience ask what the panel thinks about the recent performance of financial markets. We've got some people asking whether bond markets at the moment are being completely obscured and overwhelmed by central bank bond buying. And then we've got other people asking, what to make up, what's going on in stock markets globally, where there appears to be something of a division between, the stock market performance and the performance of real economies. So I don't know, perhaps Veronica, you might like to take a stab at what we should make of these trends at the moment.

Veronica Guerrieri:      00:58:11          Yeah. So naturally, the role of central banks has created some tension in the bond market, there is uncertainty about that again and I think for example, the ECB buying bonds is something that is good and Germany doesn't think this as much but this is something that I believe we are going to see more and more, and so this is going to affect the bond market. And the stock market is also getting a hit out of this recession for obvious reason, and that is less predictable. There are financial consequences that are important from this crisis.

Veronica Guerrieri:      00:59:12          I think these add to what I've said so far about demand, so on top the [inaudible 00:59:18] over the real effects of the supply on demand through the income of people, there is a lot of demand of [inaudible 00:59:25] coming from the uncertainty on the financial markets and the performance of the stock and the bonds market. And so this is going to play an important role in possibly depressing demand even harder down. And so, this is the main concern that I think we should be aware of when we think about the policy, the depression of demand and how the financial sector can amplify this effect.

Henry Curr:                  00:59:54          Brent, any thoughts on that?

Brent Neiman:              00:59:55          The asset markets have been very volatile, the stock market has moved very in a very volatile way at a very high frequency. So, claiming whether there's a puzzling disconnect or not with current fundamentals, particularly in a context when the stock price is supposed to tell you about the present value of future fundamentals, together of course with discounting, but no is the short answer. I think it's very challenging at this point to try and rationalize these very high frequency short run movements, and I certainly would hope policymakers don't think about the stock market as a particularly critical guiding light to things that they're thinking about to remedy the real performance of the economy.

Henry Curr:                  01:00:47          Randy, anything to add on that one?

Randall S. Kroszner:      01:00:50          Sure. I think on that volatility point, I think it shows how the markets are struggling, that it underscores the uncertainty point because every new bit of data that comes out about a potential cure or a new outbreak, the markets move enormously, and I think it just shows that there's a lot of uncertainty. So they're reacting very strongly to very small bits of information because it's such an uncertain environment. And in that uncertain environment, it's going to be really difficult for firms to feel comfortable to do investment as we were talking about before.

Randall S. Kroszner:      01:01:26          And I just worry that people think that certain policies like that the Fed has the power that can cure the virus. And I think we saw that in February when the data were coming out, and there was some movements in the market, market went down, but then it came back up we said, "Oh, well, the Fed can take care of it, the central banks can take care of this. The BCB will take care of ... the Bank of England will take care of it." Then I think the realization came, that's probably not going to happen. Then there were a lot of fiscal responses that I think have helped to give some comfort that there'll be some support for business and enterprise going forward.

Randall S. Kroszner:      01:02:08          But I think we're going to see enormous amounts of volatility. I think it's very difficult for the markets to figure what's going on, it's difficult for policymakers to figure out what's going on. And so I think, true also on the fixed income side of things, because there have been so many interventions by central banks, and they're purposefully trying to prevent various sectors from collapsing. They're purposely trying to make things easier to bring some of the risk spreads down. That may make it more difficult for some of the signals to be sent to the market, but the alternative, which is markets crater, risk spreads explode, that could lead to make it much more difficult to have recovery.

Randall S. Kroszner:      01:02:58          So, central banks are trying to put the foam on the runways. As the economy is coming down, I'm hopeful that will have the right impact of easing things rather than making things more difficult. But it is also make it more difficult for people see what the appropriate signals are in the markets.

Henry Curr:                  01:03:26          I think we all share that hope. And that's all we got time for today I'm afraid. So all that's left for me to do is to thank Chicago Booth for putting on this great session. To thank our panelists for a excellent discussion, which I for one have enjoyed a lot. And to thank you all for joining us and I wish you a good rest of your day. Goodbye.

Veronica Guerrieri:      01:03:46          Thanks.

Brent Neiman:              01:03:46          Thank you.