MNI INTERVIEW: Europe Ahead Of US In Covid Recovery-Blanchard

--Europe May Be Better Positioned Than U.S., Former IMF Economist Blanchard Says

--But Second Wave Could Prompt Stress In Weaker Countries

By Luke Heighton

     FRANKFURT(MNI) - Europe may be better positioned to begin a slow recovery

from the effects of coronavirus than the U.S., former IMF chief economist

Olivier Blanchard told MNI, but he cautioned that a second wave of lockdowns

could force governments to withdraw fiscal support and put weaker states such as

Italy under pressure.

     "I am a bit more optimistic about Europe than I am the U.S.," Blanchard

said in a telephone interview on May 21. "I have the sense that there are more

coherent policies, and there should be a recovery from here on. It will indeed

be a swoosh," he added, in a reference to the shape of Nike logo, which suggests

sharp contraction followed by slow growth.

     "I think the economy can recover fairly quickly initially, but it's not

going to go all the way back up. Q3 is going to look good, after that it will be

more of a slog."

     If a vaccine is found, there is no second round of lockdowns and fiscal

costs do not continue to increase, "the chance is that by the end of next year

we are back to something not unlike where we were before is fairly high, with

variations across sectors," said Blanchard, adding that even fiscally weaker

eurozone states had sufficient capacity to navigate the disruption.

     "[Going into the crisis] my sense was that every euro member could make it

on its own. And I include Italy. Under that assumption, the ECB can do what's

needed by committing to maintain a small spread for Italian bonds relative to

Germany and avoid undue speculation."

     "I think the ECB should obviously always be ready to do more," he added,

"but I don't see anything more it needs to do at this point in time. I think

they can relax a bit on the Italian front."

     Europe's banks also appear to have weathered the coronavirus storm "okay,"

Blanchard said, citing evidence that suggests the banking system in France would

be able to cope with a spate of pandemic-related bankruptcies among medium-sized

enterprises.

     --DARKER SCENARIO

     However, a failure to develop an effective vaccine would raise the prospect

of further waves of the virus and of significant additional economic stress,

said Blanchard, now a senior fellow at the Peterson Institute for International

Economics.

     "In the first scenario, you may want to prop everybody up until the vaccine

has come," he said. "If you think there's a good chance it's not going to

happen, then you have to let some go. In practice, the right policies must put

some positive probability on each of the two scenarios."

     "But there is a worse scenario in which Italy, and maybe other countries,

might be in more trouble, in which case it's much better - clearly - to have

mutualisation of debt and possibly transfers across members."

     Blanchard described the EUR500 billion EU rescue fund proposed by Angela

Merkel and Emmanuel Macron as "great," and a potential "breakthrough."

     "What we don't know is what's going to happen in the bargaining," he said.

"But even if it's a toned down version in which it's a lot of mutualised

borrowing but without much transfer - it could take the form of loans to

countries - it's still progress. Hope springs eternal - the initial proposal is

very substantial."

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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