Falling risk

The new wave of infections is a blow for families as well as for companies that expected to start the year with an improvement in prospects thanks to the vaccine. The restrictions on activity imposed by the majority of neighboring countries, given the virulence of the new wave of infections, presage a relapse of the European economy, delaying the recovery that was expected for ours. France seems to be one of the most affected, but Germany is not immune. For the euro area as a whole, a decline in activity is expected in the early part of the year, as foreshadowed by the contraction of the main economic indicator for the euro area. The PMI index suffered a sharp decline in January, predicting a negative first quarter.

It is worrying that the massive stimulus from the ECB will fail to reactivate demand. Businesses in good health are reluctant to invest, wasting the supply of cheap loans. This is the only way to explain that the 40,000 million euros in public investment credit guarantees made available by the ICO – a real bargain in normal times – have hardly been used. And businesses in difficulty no longer want to go into debt. They also can’t, according to the bank loan survey. Families also choose to be cautious, both those that restrict their spending despite enjoying a stable situation, and those that go into unemployment and have no choice but to reduce their way of life.

However, the Spanish economy, while losing weight, is generating its own antibodies. The productive apparatus seems to have adapted, thanks to the reorganization of work in services, the greater use of digital technology and the recomposition of supply chains after the disruption caused by the pandemic. Surveys, such as the economic confidence survey released this week, suggest that a majority of companies expect an improvement in their turnover in the coming months. The foreign sector supports these expectations. Exports of industrial and agricultural products evolve favorably in relation to the records of neighboring countries. And the interest of foreign investors in our economy is not denied, as shown by the entry of 26,600 million euros in foreign capital (with direct investment data accumulated between January and October) and the success of debt placements by the Treasure. The external balance, that barometer of competitiveness, shows a positive balance.

Strengthening the immune system of the economy to overcome the new wave of infections, that is the key. The solution is, one, to avoid the collapse of the hospitality industry and the services most exposed to administrative closure measures. We are delaying taking safeguard measures, such as direct transfers to businesses on the verge of bankruptcy or capitalization of viable companies. It is about holding on for a few more months, until the vaccine takes effect, because the cost of this support for the public finances would be much lower than the benefits that can be anticipated in the potential for recovery and containment of bank delinquencies.

Two, although the debate focuses almost exclusively on the distribution of European funds (between territories, sectors, etc.), we would do well to think about how to magnify the driving effect of this rain of money on the economy. New investments can be spurred and thus lead to recovery. But poorly managed, the funds become mere grants for projects of dubious utility, or that do not find an answer in the local productive fabric. The multiplier effect of the plan will depend, in general, on the coherence between the investments promoted by the State and the incentives to take advantage of them by the market. An alignment that will only be achieved with reforms adapted to the situation.

The next few months will be tough, but if we tackle them with smart budget impulses and bold reforms, the rebound will surprise us.

Raymond Torres is director of conjuncture at Funcas. On Twitter: @RaymondTorres_