Google, Apple, Amazon, Facebook, Uber, Airbnb: these are only few of the numerous companies which have fundamentally changed our lives with new technologies in recent years. While their business models differ, none of the stars come from Europe. Apart from the serial entrepreneurs at Rocket Internet in Berlin, SAP is the only big digital corporation in Germany. Is there a role to play for the EU in the attempts to change this? Yes, there is. However, not by means of new subsidies and detailed regulation, but by keeping markets open.
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Edward Altman is professor emeritus at NYU’s Stern School of Business and director of credit and debt market research at the NYU Salomon Center. He is also the creator of the Z-score: a heuristic index to assess the credit worthiness (and likeliness to default) of companies. The Z-score is built as a weighted sum of commonly available corporate indexes of liquidity, reinvested resources, profitability, and market capitalisation vs liabilities (here the formula). As a scoring system, it does not originate from a precise theory. Rather, it is rooted in common sense, and parameters are calibrated until they generate some useful statistical regularity. For example, for public manufacturing companies, if Z scores higher than 2.99 then the company is not likely to default; if Z scores lower than 1.81 then the risk of default is considerable.
Last month, after a long exhausting discussion, the European countries reached an agreement on the European Union’s budget, and especially on the Recovery Fund. This latter includes around €312 billion of grants for Member States and €360 billion of loans.
After many days of fierce bargaining, the EU political leaders have eventually achieved an agreement about the magnitude of the stimulus package deemed necessary to restore sound conditions for the European economy. The deal was expected. A fiasco would have badly shaken financial markets (with consequences) and raised further doubts about the ability of the current political establishment to steer the ship through stormy seas. The € 750 billion recovery package to soften the Covid-19 crisis will be particularly welcome by the Eastern and Southern European countries, as emphasized by the European Commission in its Staff Working Document, Identifying Europe’s recovery needs . Besides, it has also been agreed to widen the 2021-2027 EU budget, up to € 1,074 billion. In other words, the EU’s next seven year budget and the Next Generation EU programme (the so-called recovery plan) will provide a total package of € 1,824 billion.
Coronavirus has spread quickly across the globe. As a result, healthcare systems in several industrialised countries have been pushed to and beyond the verge of collapse. The virus has now also reached poorer countries in Africa. Although it spreads rather slowly there and hits a younger population, it is feared that people in poorer countries will be hit particularly hard considering the relatively ill-equipped healthcare systems. In these countries, healthcare does not meet Western standards. Yet, in recent years reveals significant improvements have taken place, and today most poor countries are better prepared for health challenges than they were 20 years ago. This also regards pandemics like the current one.
Central banks are exploring new monetary policies. Unconventional ones, of course. The Bank of England (BoE) has recently announced one of such attempts. Although the main concern remains how to manage a negative-interest-rates environment, BoE Chief Economist A. Haldane most interestingly mentions the expansion of the scope of the bank’s asset-purchase plan to include risky securities.
There are situations in which people are all but obliged to act differently from what they preach. The latest example was provided the president of the European Central Bank (ECB) Christine Lagarde. In mid-March, she declared that the European Central Bank «is not here to close spreads». By saying so, she wanted to emphasise that helping a member State to sell its bonds on the market is not the ECB’s job, and that no exceptions are admitted.
Five years ago, a US American hedge fund bought the distribution rights for Daraprim, a drug to cure AIDS. Overnight, the price went from $13.50 to $750.00. This price increase caused huge public outrage. Yet, high prices for pharmaceuticals are rather common in the US. No other healthcare system around the world spends as much on drugs. Partly responsible for this is the seldom used bargaining power of public insurance programmes on the one hand and, on the other hand, the market power of pharmaceutical firms caused by patents and licensing procedures.
The economic consequences of Covid-19 will be heavy: a significant portion of production came to a halt for weeks, and international value chains were disrupted. Governments will increase expenditure massively in order to hand out subsidies and respond to unemployment, while tax revenues will decline. The upshot is that budget deficits will grow, and so will public indebtedness. The European Central Bank (ECB) will make it possible by buying government bonds (govies) and injecting new liquidity, with which commercial banks will also buy (more or less) risky govies, hoping to sell them to the ECB. But a great deal of incremental debt will not be AAA-rated, so portfolio risks follow. The need for increasing the supply of low-risk bond (see Lagarde in 2019) has therefore intensified (see here and here).
The next elections to the German Bundestag have been moved up to autumn 2021. At that moment, Angela Merkel will have served as chancellor for 16 years. As opposed to Helmut Kohl in the 1990s, she does not seek re-election. Nevertheless, her tenure – which has been extraordinarily long for a head of government in a Western democracy – justifies some thoughts about the pros and cons of changing political leaders at regular intervals.