How the recovery paradox leads to overconfidence

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As mentioned by Dutch health minister Hugo De Jonge at the government’s latest coronavirus press conference, society is at risk of falling for the coronavirus prevention paradox. In a nutshell: the containment measures instated after 12 March have been so successful that people are starting to relax their previously strict compliance.

With some regret, therefore, I’m giving up this column Sandra Phlippen Chief Economist ABN AMRO

A similar trend can be seen in the economy: the recovery paradox. Let's examine how it works. As the government manages to keep the economy very much alive, purchasing power and consumer spending start bouncing back to their previous levels. This recovery, however, entails the risk of increasing infection rates. The result could be a second wave of the virus. And this time around, the general feeling among investors, entrepreneurs and clients may well shift from “This is a nuisance, but it's temporary” to “This is a nightmare that just won't end.” That type of panic is extremely harmful to the economy. In other words: a quick recovery is a dangerous recovery, and not just in terms of public health.

As an economist, I strongly recommend a much slower restart. Sure, growth recovery may take a while longer that way, but on the plus side, it minimises the odds that we end up in a true disaster scenario. But I’m starting to feel like I'm the only one who realises that. It seems as if the Dutch are unwilling to consider the “What if?” scenario. Meanwhile, in the US, infection rates have surged to a point that the second wave may in fact have already started. In Beijing, schools have closed their doors again. Things aren't looking good for India either. Now, this column isn't intended as fear-mongering, and I'm definitely no doomsayer, but wouldn't it be wise to prepare for the worst as we hope for the best?

The Dutch position regarding the European recovery fund appears to suggest that there’s no need to do that. As if the southern eurozone countries would even stand a chance without receiving support from the European Union. As if our export-oriented economy can simply shrug at the prospect of lasting poverty in southern Europe and get on with business as usual.

The recovery fund offers a buffer of sorts. And if it’s not needed after all, for example because a mass-produced vaccine has become available, the recovery money can always be partially reclaimed. This is a long-term fund, after all. Projects typically supported by such funds are all paperwork for 6 to 12 months before the first spade of earth is turned. Within that timeframe, if it's determined that the project or its funds are not needed after all, the money is likely to get partially returned to the source through a clawback mechanism.

On a more personal note, the recovery paradox is affecting me in its own way. This column has provided me with so many rewards that I've had to make some difficult decisions. Despite all the joy of writing, the touching responses from readers, and many appearances in the media, I feel that I have too much on my plate now. So last week, I gathered my team at the bank and announced my plans for our future. These plans, and my truly excellent team, require my full dedication. With some regret, therefore, I’m giving up my column. I've become very attached to this paper and its readers. Thank you so much for reading, and I hope you’ve gained something valuable.

Sandra's column appeared weekly in the Dutch newspaper AD and on our website. Although this is her final column, it certainly won't be the last opinion piece from our chief economist. We will continue to post her future publications here.


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