"If uncertainty continues to fester, this crisis may be worse than the last"

 

The coronavirus crisis has obliterated economic forecasts and left businesses and markets stumbling into a new scenario teeming with uncertainty surrounding health. Finding fertile ground in this otherwise bleak landscape is the UOC's newest research group, Finance, Macroeconomics and Management (FM2), headed up by Jorge Mario Uribe Gil, professor and expert in financial markets and applied economics. The top mission of the new research team is to study the economy, in a broad sense and with a comprehensive approach that combines microanalyses and macroanalyses. With this in mind, it has set out to find certainties to offset the unexpected turns and unpredictability that characterize today's "new normal".

 

The coronavirus crisis has obliterated economic forecasts and left businesses and markets stumbling into a new scenario teeming with uncertainty surrounding health. Finding fertile ground in this otherwise bleak landscape is the UOC's newest research group, Finance, Macroeconomics and Management (FM2), headed up by Jorge Mario Uribe Gil, professor and expert in financial markets and applied economics. The top mission of the new research team is to study the economy, in a broad sense and with a comprehensive approach that combines microanalyses and macroanalyses. With this in mind, it has set out to find certainties to offset the unexpected turns and unpredictability that characterize today's "new normal".

Our mission will be to study the intersection between macroeconomics and companies' financial decisions. These two focuses are usually pursued separately, but now more than ever we need to look at how they overlap. This is evidenced by the recent COVID-19 crisis, which has thus far triggered jarring economic and political shocks that have dramatically affected people's well-being and now threaten the survival of many companies. Our research group will also directly support the Master's Degree in Financial Management, which began during the last academic year. 

One of our priorities will be to study widespread uncertainty and its effect on companies and their optimal strategic planning. This issue will prove crucial over the coming years to get out of the crisis. We already have a couple of projects underway in this vein; we are particularly interested in analysing how the macroeconomic climate is altering companies' finance structure and how uncertainty affects productivity and investment in intangible assets, in companies and in different countries. 

The work carried out by our group is intended to benefit business owners, investors and economic policymakers. Its research goal is more pressing than ever, especially at a time like now, characterized by strong interrelations between macroeconomic variables and business decisions that will ultimately determine the survival of many jobs and businesses. Although sometimes disregarded, a certain level of coordination will prove vital when drafting economic policies. It will bring in relevant academic viewpoints on the matters of most concern to business owners, such as sources of finance, profitability in times of crisis, and managing financial risk.

The current trend in finance is towards concentration, not just in Spain but around the world. This has certain upsides, as it allows financial institutions to amplify their operations and thus generate economies of scale. There are also plenty of drawbacks, however, which are perfectly outlined in the academic literature. When market concentration increases, leading fewer institutions to exert more control over the system, to the point where they become "too big" or "too connected" to fail, this can be a potential source of risk for the system. Regulators must therefore be on the lookout for this.  

I think that the sector will emerge stronger as long as mergers go hand in hand with the strengthening of traditional surveillance mechanisms. We need to discourage the moral hazards that are created when there are only a few institutions and they are too big to fail. But it is also an opportunity for the banking sector to more effectively take on forthcoming challenges, which are many. I'm referring mainly to digitizing operations and adapting to new technologies, such as blockchain, which will determine the structure and dynamics of the sector as the future approaches. It's up to the banking sector to demonstrate, today more than ever, the value it brings to society, in an increasingly digital world in which the need for traditional banking services will eventually fade away.

Consumers will likely benefit from certain complementarities and specializations offered by the merged institutions, which as a whole will also be more solid, at least in the short term. From now on, it will depend on how the risks of these conglomerates are managed. I don’t think it will affect issues like service prices, for example.

I believe the risk is currently lower than originally forecast back in March or April. The actions of the European Central Bank and the US Federal Reserve have provided sufficient liquidity and solvency to financial institutions. Now the problem is the real economy and the financial burden of households, states and businesses, which are at historically high levels, not the financial asset market, as was the case in the previous crisis. Of course, there is a risk that this financial burden will end up in defaults by these households and companies, and that this will end up affecting banks' state of solvency. But this time round, all this will begin with the real economy.

The current levels of public debt are manageable. At the same time, this risk will inevitably increase in the face of a crisis. The way to prevent this debt crisis is by diminishing the impact that any uncertainty surrounding public policies stemming from the pandemic has on consumption and investment. It is also necessary, as many experts have said, to maintain coordination within the European Union so as to mitigate effects.

It is very difficult to know the duration of a crisis at the onset. The first attempts to predict the shape of the crisis – whether V-shaped or like the Nike swoosh – are quite funny and were barely substantiated. The issue is really not about keeping some sectors closed, subsidizing demand in others and then resuming business as if nothing happened, as was thought a few months ago. The problem is the high levels of macroeconomic uncertainty that this situation has generated. Uncertainty decreases consumption, hinders new investment ventures and prevents banks from granting credit to those who need it. This is a very persistent phenomenon and one of the focuses of my research and the FM2 group's work. It won't vanish from one quarter to the next, so a V-shape was unlikely from the very beginning. It was a naïve idea, which did not consider the second-order effects on the economy, which occur when no plans for the future can be made.

I am still optimistic, as the response of the European Central Bank and the Federal Reserve has been much more organized and potent than last time. I think that since the financial side of the crisis has been avoided, the recovery will be quicker. I am also aware that getting out of the real crisis, that is, reducing uncertainty, comes down to political coordination. If uncertainty continues to fester, the outlook of this crisis may be as bleak as the last, or even worse.