Robert Holzmann | Oesterreichische Nationalbank


COVID-19 crisis , economic history , monetary policy , European integration , fiscal policy , structural reform , climate protection

JEL Codes:

E44 , E51 , E52 , E58 , G21 , N12 , N22

As economic policymakers, we have reached a crossroads in our efforts to contain the COVID-19 crisis. We now face a range of scenarios going forward.

On one extreme end, several months from now we might be in a position to “pad our shoulders” as the united efforts of fiscal and monetary policy may have stemmed the worst phase of the crisis. In this hypothetic world, the COVID-19 pandemic will undoubtedly remain in our memory as a worldwide, catastrophic crisis in many economic and social dimensions. But we may have found a way of taming the shock and its consequences.

The other end of the continuum of scenarios presents us with a much bleaker outlook: rather than mastering the pandemic, we may be confronted with multiple new waves of infections, additional shocks (e.g. from a weakening financial sector) and rising, increasingly unsustainable public as well as private debt that impede a fast recovery.

Where exactly on this continuum our economies will stand several months from now, will depend on several unknowns. Many of these unknowns lie beyond the realm of fiscal and monetary policy – for example, when an effective vaccine will be available at a large scale.

As economic policymakers, however, we also have considerable power in shaping the future path of the global economy. Therefore, we cannot afford complacency: we are co-responsible for pushing the likely outcome of potential scenarios as far as possible towards the more optimistic spectrum.

So: what shall we do from here and where shall we look for inspiration when choosing the path to follow onwards from the present crossroads?

Milton Friedman once said that, and I quote,

“only a crisis, actual or perceived produces real change. When that change occurs, the actions that are taken depend on the ideas that are lying around.”2

Our current pool of ideas to fight the COVID-19 crisis is necessarily – implicitly or explicitly – influenced by the past. The past has generated many of the ideas currently “lying around”. And indeed, historical events such as the Spanish Flu of 19183 or the Global Financial Crisis (GFC) of 2008/094, have proven to be enlightening lenses and filters for selecting our way forward since March 2020.

Yet, historical reasoning using analogies is most useful in shaping the short-run response to crises.5 By now, we have already left behind that first bit of the road. At the present crossroads, lessons from the past may increasingly become a mixed blessing. In my opinion, caution is due for two reasons.

For one thing, some of its characteristics and consequences make the COVID-19 crisis, if not an unprecedented, at least a once-in-several-generations event for policymakers.

For another, focusing too much on historical comparison cases can make us blind to current challenges which did not figure prominently on policy agendas in the past.

I. Why might this time be different?

Why then might this crisis be particularly difficult to gauge in terms of past events?

Let me start with the comparison to the GFC, which, when the pandemic hit in early 2020, frequently served as the prime reference case. Among many other observations, a particularly prominent claim regarding the differences between the GFC and the COVID-19 shock is that, this time around, banks appear to be the solution, rather than the cause, of the problem.6 Banks seem to be much better prepared to weather the shock than a decade ago.

Since the GFC, regulators have substantially stepped up their micro and macroprudential toolkits to safeguard financial stability. Indeed, this progress on the regulatory and supervisory front has enabled banks to better cope with the initial shock and to step up their credit supply to firms and households in desperate need of bridge financing.

But this lesson from the recent past might only be half the story. In particular, we must not close our eyes to potentially dangerous developments further down the road.

As the pandemic continues to depress the economy, corporate illiquidity can quickly morph into insolvency. In this case, non-performing loans (NPL) on banks’ books are likely to increase over time. Now: at first sight, banks are today much better equipped to digest significant losses than they were 12 years ago. At the same time, almost a decade of structurally low profitability in the banking sector can turn NPL resolution post-COVID-19 into a more threatening challenge to financial stability, monetary policy transmission and the economic recovery than it was in the aftermath of the GFC.7

Weaker corporate balance sheets following a decade of sluggish growth – which may in fact partly represent side effects of our monetary policy response to the GFC8 – amplify these risks. Hence, banking sector developments during and following the GFC might be a problematic comparison and guidepost for the crossroads we are facing.

More fundamentally, the very nature of the COVID-19 crisis makes the current challenges hard to appreciate on the basis of lessons from the past alone.

One aspect that makes the current crisis particularly special is that a substantial part of the immediate economic and social damage it caused was itself a consequence of conscious policy decisions. Governments all over the globe resorted to far-reaching containment measures with a specific goal and trade-off in mind: to reduce the costs of immediate illness and death, at the expense of immediate economic costs.

In that process, when taking, or omitting to take, containment measures, governments answered – implicitly or explicitly – a question, which, in times of peace, is usually buried deep down in aggregate welfare considerations: what is the economic value of human life? No doubt, this difficult issue will stay with us when responding to new waves of infections going forward.9

These hard choices will also have effects on monetary and fiscal policy. More durable, extensive or strict containment measures may increase pressure for more monetary and fiscal accommodation in the short run to safeguard price and financial stability. Regarding monetary policy, one should, however, bear in mind that with the agreement on the EU’s Recovery and Resilience Facility (RRF) over the summer of 2020, the ECB’s monetary policy is no longer “the only game in town”. In that sense, the framework conditions for the ECB’s monetary policy have changed substantially since the expansion of the PEPP in June 2020. Second, the resurgence of the pandemic in the fall has already been anticipated in previous forecasts of the Eurosystem (both in June and September) – so, they are not news in the sense of surprises for policy which would warrant urgent responses. Third, it must be clear to all of us that the further course of the economy is foremost driven by the further development of the pandemic. The most important measure to protect the economy is to find the right balance of containment, while avoiding overly damaging lockdowns. In this context, as has been shown across the world since spring, early, targeted, decisive and effective action is required by governments, with the crucial and unavoidable challenge being acceptance, compliance and cooperation among the population. No doubt, this requires determined, responsible and credible leadership.

Quite unlike any other crisis in the past, the COVID-19 pandemic thus forces us to seek answers to questions which extend far beyond the confines of our “policy comfort zone”, while laying bare how limited the power of economic policy can be without the support from other scientific disciplines. In this sense, the current crisis also teaches us humility.

II. What the past may not teach us

Appropriate historical analogies for the current crisis may not only be particularly hard to find – they might also distract us from new challenges to which economic policymakers have too often turned a blind eye.

First, while the economically and socially vulnerable frequently suffer most during economic and financial crises, the impact of the pandemic has been extraordinarily unequal across social classes and ethnic groups even by historical standards.10 This may in turn have important repercussions for the depth and duration of the pandemic recession, and thus also on the evolution of inflation back towards target. In that sense, the distributional impact of COVID-19 is also relevant for monetary policy.

The second area I want to call your attention to is the need to use the crisis for real change. The call for Friedmanian “real change” and for “building back better” requires us to calibrate our policy response to the crisis in a way that addresses current challenges beyond “simply” closing the output gap.

More specifically, we will have a hard time finding fitting precedence for an issue that rarely figured on economic policymakers’ agendas in the past: climate change. While historical crises have proven a valuable laboratory to test how fiscal and monetary stimulus can boost aggregate demand11, we have little experience on how policies should be designed in order to score high in terms of both economic multipliers and climate impact metrics.12

It would be a misunderstanding to interpret the Eurosystem’s – and most other central banks’ – focus on the primary objective of price stability as an indication that climate change is irrelevant for the conduct of monetary policy. Here, the COVID-19 pandemic may serve us as a wake-up call. For one, the crisis has reminded us that financial markets may systematically fail to factor in tail risks such as pandemics or, for that matter, climate change. Moreover, given the impact of multiple shocks on current and expected price developments, the potential threat emanating from climate change for price stability in the medium to long term has become more tangible.13

Hence, the experience of the COVID-19 pandemic consolidated our belief within the ECB Governing Council that climate change does concern many aspects of monetary policy, including inflation, economic growth, interest rates and the transmission channels of our instruments.14 During the ongoing ECB monetary policy strategy review, we have thus pledged to carefully study the implications of climate change for our monetary policy strategy and operations.

Whether and how we might approach these risks in our monetary policy decisions and operations is one of the questions we will discuss over the coming months – but it is clear that we must be prepared to navigate hitherto unchartered waters with little historical guidance to step up to the challenge.

III. Conclusion

Let me conclude with a recent and timely reminder from Susskind and Vines (2020) regarding the need for global cooperation in tackling big global challenges like COVID-19 and climate change:

“The post-Second World War institutions have served the world remarkably well. Now, following the COVID-19 pandemic, they need strengthening and reinvigorating. Because the pandemic is such a very large event, we need to realize that the world faces a very large choice. We can do what the world did in the late 1940s, when the institutional choices which were made helped to support the golden age of global growth during the 1950s and 1960s. Or we can instead allow what happened in the 1930s to happen all over again.”15

I think this quote is particularly suitable to this conference, which has by now become an established tradition and which has the aim of bringing together the best minds and to exchange insights and views from both sides of the Atlantic.

As economic policymakers, we constantly walk through myriad halls of mirrors. We will more easily find the right exit from these halls if we work together to install a couple of non-reflecting, clear-sighted windows that allow for a steady view on the outside world.

Let’s pave the way for a new golden age during the 2020s – by drawing lessons from the past, but also by looking at the present and keeping in mind the future at the same time.


Acharya et al. (2019). Whatever It Takes: The Real Effects of Unconventional Monetary Policy. Review of Financial Studies, 32(9), pp.3366-3411.

Alon, Doepke, Olmstead-Rumsey, and Tertilt (2020). This time it’s different: the role of women’s employment in a pandemic. IZA Discussion Paper 13562.

Altavilla, Canova and Ciccarelli (2020). Mending the broken link: Heterogeneous bank lending rates and monetary policy pass-through. Journal of Monetary Economics 110, pp.81-98.

Ari, Chen and Ratnovski (2020). COVID-19 and non-performing loans: lessons from past crises. ECB Research Bulletin 71, 27 May 2020.

Correia, Luck and Verner (2020). Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu. Federal Reserve Bank of New York Working Paper.

Eichengreen (2012). Economic History and Economic Policy. Journal of Economic History 72 (2), pp.289-307.

Eichengreen (2016). Hall of Mirrors: The Great Depression, the Great Recession, and the Uses – and Misuses – of History. Oxford: Oxford University Press.

Fishback (2017). How Successful Was the New Deal? The Microeconomic Impact of New Deal Spending and Lending Policies in the 1930s. Journal of Economic Literature 55(4), pp.1435-1485.

Friedman (1962). Capitalism and Freedom. Chicago: Chicago University Press.

Giese and Haldane (2020). COVID-19 and the financial system: a tale of two crises. Oxford Review of Economic Policy 36(1), pp.200-214.

Hansen, Lin and Mano (2020). Should Inequality Factor into Central Banks’ Decisions? IMF Working Paper 20/196.

Hausman (2016). Fiscal Policy and Economic Recovery: The Case of the 1936 Veterans’ Bonus. American Economic Review 106 (4), pp.1100-1143.

Hepburn, O’Callaghan, Stern, Stiglitz, and Zenghelis (2020). Will COVID-19 Fiscal Recovery Packages Accelerate or Retard Progress on Climate Change? Oxford Review of Economic Policy, 36(Supplement), pp.359-381.

Holzmann (2020). To each crisis its analogy, to each analogy its critical reflection. SUERF Policy Brief No 27/2020.

Kirby (2020). Evidence Mounts on the Disproportionate Effect of COVID-19 on Ethnic Minorities. The Lancet Respiratory Medicine, 8(6), 547–8.

Krishnamurthy, Nagel and Vissing-Jorgensen (2018). ECB Policies Involving Government Bond Purchases: Impact and Channels. Review of Finance 22 (1), pp.1-44.

Lagarde (2020). The monetary policy strategy review: some preliminary considerations. Speech at the “ECB and Its Watchers XXI” conference, Frankfurt am Main, 30 September 2020.

Liu, Mian and Sufi (2020). Low interest rates, market power and productivity growth. NBER Working Paper 25505.

Romer and Romer (2004). A New Measure of Monetary Shocks: Derivation and Implications. American Economic Review 94(4), pp.1055-1084.

Rowthorn and Maciejowski (2020). A Cost–Benefit Analysis of the COVID-19 Disease. Oxford Review of Economic Policy, 36(Supplement), pp.38-55.

Schivardi, Sette and Tabellini (2020). Identifying the Real Effects of Zombie Lending. Review of Corporate Finance Studies (forthcoming).

Schnabel (2020). When markets fail – the need for collective action in tackling climate change. Speech at the European Sustainable Finance Summit, Frankfurt am Main, 28 September 2020.

Susskind and Vines (2020). The economics of the COVID-19 pandemic: an assessment. Oxford Review of Economic Policy 36(1), pp.1-13.

Yahmed, Cappellari, Checchi, Corak, Jenkins, Neidho fer, Tertilt and Tommasi. COVID-19 and Inequality. ZEW policy brief 20(5), pp.1-4.

  • 1.

    Speech by Robert Holzmann, Governor of Oesterreichische Nationalbank, held at the SUERF • CGEG|COLUMBIA|SIPA • EIB • SOCIETE GENERALE E-Conference „How to spend it? How to pay it back? EU and US Perspectives “ on 14 October 2020.

  • 2.

    Friedman (1962), p.XVI.

  • 3.

    For example, recent research based on the Spanish Flu of 1918 appears to confirm that an uncontrolled pandemic can affect the economy more negatively than the timing and severity of countermeasures (e.g. lockdowns). In fact, in 1918, stricter countermeasures were associated with stronger recovery effects over the medium term. See Correia et al. (2020).

  • 4.

    For example, the GFC taught us that a monetary union like the euro area needs strong monetary policy signals to ensure financial stability in the short term and to prevent financial market fragmentation and an impairment of monetary policy transmission in the medium term, c.f. Krishnamurthy et al. (2018), Altavilla et al. (2020).

  • 5.

    c.f. also Eichengreen (2012, 2016) on this point, whose book “Hall of Mirrors” inspired the title of this speech.

  • 6.

    c.f. Giese and Haldane (2020).

  • 7.

    c.f. Ari et al. (2020).

  • 8.

    c.f. Acharya et al. (2019) for recent empirical and Liu et al. (2020) for recent theoretical evidence regarding this point. For the econometric difficulties attached to identifying the real effects of zombie lending, c.f. Schivardi et al. (2020).

  • 9.

    c.f. Rowthorn and Maciejowski (2020).

  • 10.

    c.f. Kirby (2020) for recent evidence from the United Kingdom.

  • 11.

    c.f. Hausman (2016) and Fishback (2017) for fiscal policy and Romer and Romer (2004) for monetary policy.

  • 12.

    c.f. Susskind and Vines (2020).

  • 13.

    c.f. Schnabel (2020).

  • 14.

    c.f. Lagarde (2020).

  • 15.

    Susskind and Vines (2020), p.11.

About the authors

Robert Holzmann

Professor Robert Holzmann is Governor of the Austrian Central Bank and member of the Governing Council of the European Central Bank since September 2019. He is a full member of the Austrian Academy of Sciences and holds honorary positions at the South-Western University in Economics and Finance, Chengdu; University of Malaya, Kuala Lumpur and University of New South Wales, Sydney. In addition to academic positions in Austria and Germany, he worked at the OECD and at the IMF as a senior economist. At the World Bank he led the pension strategy work as Sector Director of the Social Protection & Labor Department. Professor Holzmann also served internationally as senior advisor on pensions, financial literacy & education, labor market and migration issues. He has published extensively on financial, fiscal and social policy issues. He has travelled to over 90 countries in the world.

More on these topics