If you were tasked with crafting the most eye-watering resumé imaginable for a finance student, you’d be hard pressed to do better than Arnoud Boot’s. The University of Amsterdam’s very own Professor of Corporate Finance and Financial Markets, whose expertise has previously been called upon by the central banks of the Netherlands, France and Sweden, also happens to be the author of a collection of renowned books on banking and finance, a chairman of the SAFE Research Advisory Council and a fellow of the Royal Netherlands Academy of Arts and Sciences. A comprehensive list would require an article of its own. In the midst of Coronavirus pandemic, Professor Boot the international economist sensed his expertise was needed to provide damage control among his network of colleagues from around the world. He subsequently drafted an open letter to Dutch financiers, condemning their needlessly combative stance in the dispute over an emergency rescue package for Italy. It proved to be a resounding success, as the broader economics community signed on and rallied behind his message. He is also confident that in hindsight the Dutch government will also be grateful for his actions. It was in the wake of these developments, as he was once again propelled to the forefront of the national (and international) conversation, that he checked in with his home student base. On April 16th, Professor Boot returned to Room for Discussion, naturally from the digitised safety of his own home. He holds an esteemed position among the eclectic guest list, as he was in fact the very first to share his insights with the committee almost 12 years ago, in the midst of the 2007-08 financial crisis. If there’s something weird (in the financial markets), and it don’t look good, the answer to the question “Who you gonna call?” appears to be Arnoud Boot.
Appropriately, first on the agenda were the parallels to be drawn with our last financial disaster. Then as now, those in charge faced unrelenting pressure to explain the situation and their actions in response. However, interestingly, Professor Boot contends that back then the times were even more uncertain, as the very foundations of the financial sector were crumbling due to an “unknown unknown”. The epidemic we currently face may bear a deeper personal impact, but at least our foe is identifiable: COVID-19 is a “known unknown”. Furthermore, the macroeconomic forecasts sound far more dramatic than the realities they entail. According to the IMF, Dutch GDP is slated to be down by 7.5% for 2020. Considering that a total freeze of all economic activity for one month would ipso facto forgo 8.33% (1/12) of annual GDP, this figure isn’t entirely unexpected or alarming. In the throes of the Great Depression, no one knew how to rebuild and restart the economy. Today, once the pandemic passes, the economy will be more or less intact, as will be the infrastructure to rebound within 2 years. That being said, Professor Boot forewarns that given the dire state of retail sales figures and benefits applications, we will have to accept that some sectors will suffer greatly, and that many businesses will inevitably close-down. For most, when the world resumes it is equally inevitable that they will reopen (albeit perhaps under new ownership), but those trading in intellectual capital, where the sum of parts is greater than the whole, are exposed to serious long-term setbacks.
As advocated in his letter, Professor Boot maintains that solidarity within the European Union is crucial: all members states have a vested interest in confronting this side by side, and should mesh national plans with a unified European strategy. And yet, he laments, the opposite message has been broadcast by Dutch financiers. Despite lauding the leadership Mark Rutte’s government has provided throughout his term, he fears that a decade of protracted financial negotiations with the EU have left the Prime Minister frustrated and impatient, and now the political clout of the Netherlands has been squandered, sacrificed in the firing line of an unnecessary battle. Long-standing structural problems cannot be resolved in the midst of a crisis, as negotiating whilst backed into a corner is seldom fruitful. The argument in itself was both pointless and damaging. Without a rescue package, Italy will simply be borrowing from EU coffers via the ECB. Financiers that don’t want to be sympathetic today must ask themselves if they want to compound crises and risk splitting up the Eurozone. Professor Boot warns that such reckless diplomacy is in fact “playing with fire”, as all harsh sentiments find their way into the financial markets. Approval for the European Project dropped below 30% last week in Italy, despite historically being one of its most fervent supporters. Tangentially, therein arises the precariousness of referendums where everything depends on the fickle mood of the moment. Change should be achieved through the channels of the parliamentary process, not carelessly decided upon in by-the-second popularity contests.
Thankfully, last Friday, an agreement was reached by the EU for a 540€ billion stimulus package. As Professor Boot asserts all good international macroeconomic policy should, it entails a combination of measures to be implemented simultaneously. The first portion of the package contains a revamping of the ESM (European Stability Mechanism), the rescue mechanism created in response to the global financial crisis. Originally, it was designed to provide financial support to ailing individual countries, conditional on fiscal restructuring. However, in light of the systematic impact of the virus, these requirements have been lifted: so long as the money is broadly targeted towards public health, EU members have access to a maximum of 2% of their GDP in ESM funds (around 38€ billion for Italy). Nonetheless, formally these remain loans, albeit at highly favourable interest rates. Secondly, a 100€ billion fund called SURE (Support to mitigate Unemployment Risks in an Emergency) has been specially designed to facilitate labour time reduction and unemployment pay-outs to workers. The third element comes from the EIB (European Investment Bank) as it has pledged 200€ billion in credit guarantees for businesses across the EU. The ECB itself has, independently from the fiscal package, committed to purchasing 750€ billion of sovereign debt and 250€ billion of corporate debt under the Pandemic Emergency Purchase Program. Essentially it has also removed conditions on its lender-of-last-resort function, so as to provide the necessary reassurance to dissuade speculative runs on individual countries. Professor Boot stresses that with the ability to literally print money, the ECB alone can provide such an insurance policy. It cannot however, become political. If favouritism is perceived (for example towards southern European nations) support from governments and public would quickly dry up. Independent in itself, national leaders remain accountable for the ECB, and must lend it legitimacy by aligning themselves with its proposals. As was the case in previous crises, questions arise regarding the sustainability of the Eurozone. The Euro remains the currency of 19 countries and foreign to every single one, but despite the railings of populist leaders, now is not the time to re-engage in that discussion. On the topic of Corona-bonds, Professor Boot seems torn. If there were a way to contain their implementation within the context of the pandemic, he would welcome the idea. The problem is, in his view, that nothing happens in isolation, and they would set a dangerous precedent for “Euro–bonds” and the accompanying mutualization of liability across Europe in the future.
A discussion over a new recovery fund is on the books for April 23rd. Professor Boot affirms that whereas the previous package was intended to stabilise, this one shall be aimed at healing and speeding Europe’s recovery. Already a debate rages over what should be included in it. Although it is a golden opportunity to set environmentally sustainable goals, it should not be exploited as a vehicle for Brussels to force through its grand plans: “Brussels is not the Washington D.C. of the United States of Europe”, he proclaims. To be effective, the recovery package needs to be targeted and specific in its scope. He hopes the well hasn’t been poisoned for EU cooperation, as compromises will be unavoidable.
Looking towards the future, Professor Boot’s main concern appears to be the fate of the Euro. A monetary union requires close alignment, and there are clearly growing urges to diverge. With modern technology that could easily support a frictionless internal market with multiple currencies, the Euro seems redundant today. Furthermore, as a symbol of unity it has largely backfired and is now a source of divisiveness in itself. What of the fate of the EU if the Eurozone dissolves? It is imperative that Europe speaks in a unified voice on the world stage. Another of Europe’s four freedoms, the free flow of capital also appears to keep him up at night. If a crisis illuminates one glaring flaw in our modern financial markets, it’s that untethered capital flows desperately need an anchor in periods of extreme uncertainty, or the system as a whole may not weather the storm.
In our case we can only hope that Professor Arnoud Boot will continue to be somewhere near the helm when the financial markets next hit rough seas, so as to provide us with a sorely needed dose of knowledgeable cautious optimism. Find the interview for yourself at Room for Discussion or UvA Radio’s Facebook page, or let the link below take you there directly.