The coronavirus and its economic fallout for the Monetary Union

After just two months, the corona virus outbreak in China evolved into a pandemic. As a consequence, global recession looms: stock markets have collapsed, and factories, airports, offices, schools, and shops in many countries have been closed in the effort to contain the virus. Companies are confronted with a sudden drop in turnover, putting their continuity at stake, workers are worried about their jobs, and investors fear companies will default on their debts. All this points to one of the sharpest economic contractions in modern times.

China’s GDP probably shrank by 10-20% in January and February 2020 compared with its GDP a year earlier. For as long as the virus rages, similar drops are likely in the U.S. and Europe, drops that could trigger a further downward lurch in Asia. The consensus projections are that the U.S. economy will contract at a 2% rate in the first quarter of 2020 and a 3% rate in the second, and then bounce back in the second half of the year. A contraction in U.S. economic activity would mean global recession. Massive government intervention is required to ensure that this shock does not spiral into a depression. But scale alone is not good enough—new financial tools need to be deployed, and quickly.

Despite the decisive move of the governments in the Monetary Union, we were not immune from this virus and its economic fallout. Because of the size and openness of our economies coupled with an already contractionary economy, the economic fallout of this coronavirus pandemic is in danger of sparking the most severe recession in living memory. The response needed to avoid this economic precipice is on a scale that exceeds our capabilities.

Before this coronavirus pandemic, tourism in Curaçao was the only sector performing well in an economy that has been in a recession during the last five years and Sint Maarten was struggling with the recovery in the aftermath of Irma. The lockdown of the monetary union has been necessary and has so far done much good to save lives. Yet the costs of this shutdown are growing by the hour. The tourism sector has been brought to a virtual standstill, depriving our economies of the much-needed foreign exchange and economic activities.

Businesses that shut down still must pay their debts, rents, payrolls, and taxes. People who lose income have to pay rents, mortgages, and consumer debts on top of food and daily expenses. Money troubles themselves spread like a virus. When a business cannot pay, its creditors, employees, investors, and banks are in trouble. And if people worry that banks and other financial institutions are going to fail, they run to get their money out—and we have another crisis. If no appropriate policy response is at hand, all this points to a worsening of the already sorry state of the economy. The result of this pandemic may very well be a long recession.

Governments in the monetary union have announced that they are riding to the rescue of the economy and the social consequences of this crisis. But no amount of money can make up for losses of the magnitude we are facing if this extends for several more weeks. With an economy in a recession, unemployment in double digits, balance of payments under pressure, and a fiscal policy strained by the demands imposed by the fiscal rules, not much fiscal room exists to address a crisis of this magnitude. Given the direct and indirect impact of this crisis against the backdrop of the current economic situation, the GDP may contract further by 15 to 25%.

The ensuing policy debate should not pit how many lives to sacrifice against how many jobs we can afford to lose. However, no society can safeguard public health for long at the cost of its overall economic health.

The question is: What should we do to make up for the losses? An efficient and flexible economic plan must be devised fast. Clearly the policy goals should be providing relief to people who are suffering hardship from job loss or sickness and providing emergency loan financing to healthy companies so they can survive the viral economic shutdown and revive the economy on the other side. Now is not the time to carve up businesses in bankruptcy court.

The issue is not stimulus. Stimulus will do no good and will be counterproductive. You cannot shop or travel when stores and airlines are closed. In addition, our economies are constrained by our balance of payments. To stimulate the economy is tantamount to stimulating the economies of the countries we are importing from at the expense of our foreign exchange reserves. Our foreign exchange reserves also are not infinite. As noted, the shutdown has affected the main generator of our foreign exchange, namely, tourism. This loss of tourism will further constrain our ability to finance any rescue package. Therefore, any domestically financed rescue package will bring undue pressure to bear on the already strained foreign exchange reserves, hence undermining the stability of the peg.

With the recent decision of the Kingdom government to provide foreign financing for the government’s financial response to this crisis, the basis has been laid to avert a catastrophe. As was the case during the passing of Hurricane Irma, this pandemic is an external shock, which is threatening to throw the economies of the monetary union into a brutal recession. Therefore, the financial support of the Kingdom government is the appropriate policy response and should be similar to the response adopted in the aftermath of Irma—adjusted for the bureaucratic tangles that led to the ineffectiveness of the Fund.[1]

The governments of Curaçao and Sint Maarten should establish the rescue package corrected upward to take into account that this pandemic has rendered unattainable the realization of the current government program based on the pre-coronavirus projections.[2]

A critical component for the rescue package is a precautionary line of credit for the central bank for balance of payments assistance. With a growing deficit on the current account of the balance of payments, dwindling foreign exchange reserves, and a vanishing tourism sector, the current peg is bound to come under pressure if this pandemic lasts into the summer. A precautionary line of credit will underpin the authorities’ commitment to weather the current storm and maintain the current peg.

Consistent with the balance of payments constraint, the central bank should not err on the side of loosening its monetary policy nor should it relax its prudential measures. Rather, the central bank should be resolute in its financial stability function, which regretfully has taken a backseat position, to ensure the financial sector’s soundness and stability.



[1] Consistent with the European Commission President Ursula von der Leyen’s announcement that “national governments can spend their way out of the economic fallout from the coronavirus without fear of reproach,” the Kingdom put adherence to the Rijkswet Financiele Toezicht (Rft)’s deficit rules on ice by acceding to the monetary union governments’ requests for foreign assistance to cope with the fallout of the coronavirus crisis.

[2] It is important to remember that the response to this pandemic will not eliminate the economic ills we were confronting before this crisis.




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