(Bloomberg) — European Central Bank top officials amplified their call on governments to keep supporting euro-area economies as they recover from the coronavirus slump, warning against prematurely removing aid.
Speaking on Monday, President Christine Lagarde said her biggest concern right now is that measures such as debt moratoria, state guarantees and furlough schemes are phased out too abruptly. Executive Board member Isabel Schnabel argued separately that European governments shouldn’t start worrying about rising debt levels, and Vice President Luis de Guindos said fiscal policy must be the first line of defense.
Their appeal comes as countries impose new restrictions to curb a surge in infections that risks scuppering the region’s nascent recovery and may raise the need for more stimulus.
“Clearly what we hope, policy makers will understand and will determine, is that those supports have to be continued for a period of time, even as the recovery takes hold,” Lagarde said in an online discussion on the sidelines of the annual meetings of the International Monetary Fund.
Those measures should stay in place “even as the pandemic gradually phases out so that there is a smooth transition into a full-fledged recovery,” she said.
The ECB has bought large amounts of debt issued by governments to finance their aid packages through its 1.35 trillion-euro ($1.6 trillion) emergency bond-buying program. Schnabel said policy makers will continue providing the backstop, and economists widely expect the scheme to be expanded by the end of the year.
Monetary policy “will remain a stable and reliable source of support throughout the crisis,” Schnabel said on Monday. Guindos added that the ECB still has time to decide on whether or not to increase support, as it has spent less than 50% of the total envelope earmarked for the pandemic program.
“We’re continuously analyzing how the economy is evolving, how inflation expectations are evolving,” he said at an event organized by the Institute of International Finance, adding that updated projections are due in December.
ECB chief economist Philip Lane said in an interview published Sunday that the institution will decide “meeting by meeting” whether more monetary stimulus is needed. The Governing Council holds its next policy session on Oct. 29.
(Updates with comments from Guindos starting in second paragraph.)
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Bank of Canada says economy will likely be scarred by COVID-19 until 2023 – CBC.ca
Maybe it’s his job to prepare us for the worst, but Canada’s chief central banker, Tiff Macklem, has warned of a long, slow recovery as successive rounds of COVID-19 lead to a “scarring” of the domestic and world economy.
After what some see as a false dawn this summer as the economy resurged, Macklem, governor of the Bank of Canada, and his senior deputy, Carolyn Wilkins, offered a gloomy outlook for an economy that they say is unlikely to get back on track until 2023.
Not only that, but jobs — hit harder in this recession than the last one — are disproportionately affecting Canadians with the lowest wages. While 425,000 jobs disappeared following the 2008 credit crisis, this time around, employment has been cut by 700,000.
And Macklem said some of those jobs may never come back.
“We’re going to get through this, but it’s going to be a long slog,” he said at a virtual meeting with financial reporters on Wednesday.
Good news? Lower for longer
The good news, if you could call it that, was that the central bankers have committed to keeping interest rates at current extraordinarily low levels until inflation climbs back to between two and three per cent, which they don’t foresee as likely for three years.
Forecasting the economy is always something of a guessing game, but Macklem and Wilkins said that this time there was added uncertainty because of not knowing what the novel coronavirus is going to do next.
The central bankers made it very clear that the current outlook depends on a number of assumptions about the path of the pandemic that may turn out to be better or worse than they currently foresee.
Among those assumptions is that the virus will return in succeeding waves, each less damaging than the last. Another is that a vaccine will not become widely available until 2022, a sobering estimate from sober central bankers that may be disheartening for those who had hoped U.S. President Donald Trump’s optimistic outlook of an October vaccine launch was more than just electioneering.
By promising that interest rates will stay low until 2023 — something central bankers call “forward guidance” — Macklem said he hopes businesses and consumers can confidently borrow for the medium term without fear that interest rates, and therefore loan repayments, will suddenly shoot up.
That’s good if you are buying a new stove but not for a home, or for a longer-term business investment. To influence those longer-term rates, the central bank has shifted the way it buys bonds as part of its quantitative easing plan that it initiated for the first time following the COVID-19 market disruption.
When the market crisis hit in early spring, the bank bought short-term bonds to help increase the amount of money in circulation, reassuring investors, Macklem said. But now that markets are working more normally, the Bank of Canada has reduced its monthly bond purchases from $5 billion to $4 billion and is switching to buying bonds that don’t mature for up to 30 years, in theory making longer-term loans cheaper.
Economy scarred by COVID-19
But while making borrowing cheap will help, the central bank worries that it won’t be enough to prevent the economy from being scarred by large employment losses as some people’s jobs never come back.
“We’ve assumed that a fraction of these people are permanent,” Wilkins said. “That’s because with COVID, not only is the recovery going to take longer so that there is more chance there’ll be scarring, it’s also the types of jobs created.”
As the economy rebounds, she said, the new jobs available will not match the skills of those who became unemployed. Among those worst hit will be women and young people.
“The effects of this pandemic have been extremely uneven,” Macklem said, directing reporters to a “particularly stunning” chart in the Monetary Policy Report, reproduced below, showing low-income workers have suffered more and their jobs have uniquely failed to recover.
Just as we saw during the long climb out of the last recession, replacing those jobs will require new private investment, some of it in entirely new sectors. But with so much uncertainty — and so much permanent structural change — Macklem said many companies will be hesitant to invest until things begin to stabilize.
“Clearly we are seeing a resurgence of the virus — it’s happening in Canada and it’s happening elsewhere,” he said.
Macklem’s current economic outlook is only a best guess based on so many unknowns. It may be that the virus gets even worse, he said, and it may be that a vaccine does not arrive until later than the bank has estimated or that it is ineffective.
But while the central bank is compelled to consider the bleakest case in its economic planning, Macklem does not exclude the possibility of a far less gloomy outcome, which he said would be “wonderful.”
“There’s certainly scenarios where a vaccine is available early next year and it proves effective, and we can deploy it at scale so that by the end of the year, we don’t need to physically distance anymore.”
And from a central banker, that is a positive ray of sunshine.
Follow Don Pittis on Twitter: @don_pittis
Building a stakeholder economy – Brookings Institution
Norms and expectations of what corporations should do are changing rapidly. In August 2019, the Business Roundtable, an influential club of the chief executives of major U.S. corporations, announced a new statement on the “Purpose of a Corporation”. Signed by 181 CEOs, the statement of purpose called for a departure from “shareholder primacy” to “stakeholderism” as a core principle of corporate governance, with the CEOs committing to “lead their companies for the benefit of all stakeholders”.
This change of heart in corporate America is a belated response to the decades-old critique and activism against shareholder-primacy. Preoccupation with quarterly profits is blamed for making corporations short-sighted, leading to environmental pollution, income inequalities, weakening workers’ rights, and lower capital investments—all of which are believed to undermine social cohesion and long-term competitiveness. Stakeholderism, also called stakeholder economy/capitalism by the World Economic Forum, is expected to encourage a long-term orientation by rebalancing the asymmetric power of shareholders vis-à-vis other stakeholders, and revitalize the legitimacy of business.
A sizable share of corporations already practice some form of stakeholderism in response to pressure from value-conscious investors, consumers, and others. More than 80 percent of large corporations, for example, claim to explicitly contribute to the Sustainable Development Goals. Environment, social, and governance (ESG) investing—a class of value-based investments that target corporations that meet minimum ESG criteria—has been growing rapidly, with an estimated total value of $45 trillion in assets under management.
Ambiguous definitions, mixed results
But stakeholderism has had mixed success. While some companies have managed to create environmental and social value, many engage in “greenwashing” or “impact washing” to mask their unsustainable performances. This is in part due to a mismatch between a renewed corporate purpose that emphasizes stakeholder value, and corporate governance principles and incentive structures that are primarily designed to maximize shareholder returns. Even as corporations make commitments to take greater societal and environmental roles, they often fail to change their governance guidelines and board structures to reflect these intentions. This has resulted in a dissonance between what they aspire to achieve and what they can show for it—a process that can also undo the legitimacy of the emerging stakeholder economy.
This is due to a lack of consensus on how corporate governance should adapt to help build a stakeholder economy, due in part to a lack of clarity on who qualifies as a stakeholder as well as what stakeholder value entails. Think of Facebook, with almost 3 billion users, or Boeing, with thousands of customer airlines and hundreds of millions of passenger users, all of whom would qualify as stakeholders. Without specificity on what value a company creates, for which stakeholder and how, a generic commitment to advance stakeholder interests has little practical meaning.
It is also feared that the ambiguity of stakeholderism could enable corporate leaders to amass too much discretionary power that would enable them to dodge shareholder oversight. A vague commitment to all stakeholders could also undermine long-term competitiveness if managers set out to meet multiple goals that are incompatible with one another. Further, implausibly high expectations can end up making managers risk-averse, forcing them to settle for a minimum acceptable performance for all stakeholders rather than excelling in specific issues where they have greater competitiveness. A vague and broad focus on stakeholder value could thus make shareholders and other societal stakeholders worse off.
Needed: Institutional Reform
These critiques, however, do not warrant the conclusion that building a stakeholder economy is an impossible agenda. A growing body of scholarly work, including a recent British Academy report, has documented that building a stakeholder economy requires extensive reforms of market institutions to incentive the creation of long-term corporate and social value. At a minimum, such a reform would include three ingredients.
- Renewed corporate purpose. This is best defined by the directors of individual businesses, who should specify the stakeholders to whom the businesses will create value, and how this will be achieved. This facilitates effective corporate governance by providing clearly defined goals, and the mechanism for aligning them with corporate strategy. A study by professors Oliver Hart and Luigi Zingales suggests that organizational purpose anchored in maximizing shareholder welfare can help link corporate strategy with stakeholder value. To the extent that shareholders care about certain non-financial outcomes, such as environmental sustainability, the purpose of the corporation should be geared towards producing these outcomes. Corporations can then communicate their performance via third-party verified reports to demonstrate if and how they have created the desired outcomes to their stakeholders.
- Corporate law reform. Corporate law needs to incentivize directors to take responsibility for the company’s long-term interests, including its social and environmental impacts. Corporate law in many countries is anchored on the principle of shareholder primacy, creating legal challenges for firms that adopt a broader conception of purpose. A recent study commissioned by the European Union underscored the need to modify corporate law to foster the pursuit of long-term corporate goals and environmental sustainability by corporate directors. Another positive development is the emergence of legal innovations for new corporate entities with governance structures designed for addressing long-term societal issues. More than 30 states in the U.S. have introduced legal mechanisms for “benefit corporations” that pursue a hybrid mission of creating financial and social/environmental value. Similar innovations could facilitate investments into corporate innovations for addressing social and environmental problems.
- Complementary regulations. Stakeholderism should not be expected to substitute for the regulation of negative environmental and social externalities. Many of the issues that currently fall within ESG domain are in fact negative societal and environmental externalities that are not suited for self-regulation by markets. Effective regulation of externalities, such as CO2 emissions, can also level out the playing field by penalizing the distorting effects of non-compliance. In a positive development, the European Commission has recently started to develop a legal framework for mandatory human rights and environmental due diligence, which is expected to outline corporate directors’ duties “not to do harm”.
Building a stakeholder economy requires breaking the artificial boundaries that isolate purpose from performance and creating incentive structures that make corporations drivers of sustainable prosperity. This will entail systematic effort to rewire market and regulatory institutions to ensure that they serve the long-term interests of society.
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