Governments should therefore allow fiscal stabilisers to play freely, and not hesitate spending resources to implement an active policy of prevention, containment and care. The Italian authorities have already made a request to the European Commission to this end, and they are right to do so. Secondly, company closures, even temporary ones, can quickly lead to bankruptcy, triggering a vicious circle through the deterioration of the banks' balance sheets. If central banks cannot produce medicines, it is up to them to ensure that liquidity does not run out, while bank supervisors may temporarily allow an increase in risk on bank balance sheets. It is also justified for governments to come to the rescue of companies in difficulty as a result of their trade links with China or as a result of local containment measures, through credit facilities for example, since bankruptcies caused by an external shock and not by a lack of competitiveness would cause lasting damage to the country's economic potential. This is the path that Germany has decided to take. However, it must be anticipated that supply-side support measures of this kind can also have undesirable long-term consequences if, for example, they allow unprofitable companies to stay afloat. In any general measure, no matter how justified, there are windfall and side effects, but this is not a reason for not undertaking them.
Should we fear that a financial crash will add to the damage caused by the epidemic?
Until February 24, global financial markets had not reacted significantly to the news from China. Implicitly, investors believed that as long as the epidemic remained essentially a Chinese affair the world economy would not be too badly affected and that central banks would come to the rescue anyway, starting with the US Federal Reserve, which the interest rate futures markets had begun to price in. The dramatic increase in the number of cases in Italy, and especially the CDCP's statement that the epidemic was in all likelihood going to turn into a pandemic and affect the United States changed the situation radically. Since then, stock markets have lost between 10% (CAC 40) and 15% (DAX 30), with the US market (S&P 500) losing 12% before recovering somewhat on Monday 2 March. A severe correction, certainly, but without signs of panic: trading volumes have increased, albeit reasonably. In reality, and so far, financial markets are following the news flow, reacting to the unexpected (Italy) rather than pricing the worst-case scenarios. For example, while sovereign bonds that were considered safe havens were rising in value - the 10-year yield on German Federal Government bonds fell by about 0.25 percentage points, the 10-year yield on Italian Republic bonds rose by the same amount, implying a symmetric loss of value.
The markets seem to have integrated a kind of mid-range scenario, where corporate profits would fall significantly in 2020, at least compared to previous forecasts, before recovering in 2021, without the world economy being caught in an uncontrolled downward spiral.