II pillar

Even though real life and the real economy were in standby mode virtually everywhere in the world in April, stock markets demonstrated impressive growth after the sudden declines of February and March. The MSCI Index, the world’s largest measurer of the value of companies, rose by 11.1%.

Stock exchanges in the Baltic Republics also experienced similar growth. While these exchanges have reacted with somewhat of a delay in previous market cycles to the changes in mood of international markets in the downturn and above all upturn phases, this time the local securities market has been almost in complete sync with the larger markets.

This characterises the global nature of the present crisis: the virus quickly crossed national borders. Also, almost all markets and asset classes were priced against expectations of a perfect future before the crisis, but this was largely a consequence of monetary policy, which inflated asset prices.

No one can yet predict exactly how and when the economy will recover. Some regions and economic sectors are recovering faster than others, but it is already clear that those (countries, businesses and families) who had accumulated reserves will find it easier to survive the crisis.

By the end of April, the securities markets had recouped a large part of their losses. Even so, it rather reflected expectations for the short-term effects of the monetary and fiscal policies of the world's major powers rather than the long-term outlook for the global economy.

The modern economy and society as a whole have been focused on the pursuit of efficiency. Efficiency was sought everywhere; for example, companies minimised inventories and national healthcare systems minimised the number of beds. In the financial world this also meant that companies reduced ‘expensive’ equity through share repurchase programmes and used as much ‘cheap’ loan money as possible.

While central banks and governments smoothed out every small setback, only the ‘fools’ worried about the actual realisation of a worse-than-average scenario. However, the shock that impacted our everyday lives has shown us that efficiency may sometimes be dangerous, perhaps even fatal.

Of course, nature does not chase efficiency. Evolution has proven the need to stockpile assets: only those species that have survived exceptionally difficult times have endured. Unfortunately, the current organisation of society has set the goal of reducing personal responsibility. I am not opposed to collective action and coordination, but it should not diminish each person’s own responsibility.

Adapting to changed circumstances

According to the Estonian Central Bank, households in Estonia have deposits worth approximately EUR 8 billion, although they are very unevenly distributed: 40% of families have savings of less than EUR 1000. This can make it difficult for many people to cover their daily expenses fairly quickly if they lose their job.

I suspect that small savings are not so much due to low incomes, but are a question of choices and responsibility. In a similar survey conducted last spring by the US Federal Reserve, it was revealed that about 40% of Americans lack sufficient reserves to cope with an extraordinary expenditure of USD 400. At the same time, the US gross domestic product per capita is EUR 58,000, while in Estonia the same figure is EUR 21,000.

I do not believe that the economy and other aspects of life will quickly return to their former rhythm and volume once the state of emergency ends. Perhaps the lifting of restrictions will initially be celebrated, and some emotional purchases will be made. However, it is likely that many people will realise that their savings, which have most likely been used up by this point, were insufficient even before the crisis occurred, and they do not want to find themselves in the same position in the future.

I believe that the first thing we will see is a change in the behaviour of people (consumers) – it will take longer for companies to adjust. Many companies will be unable to adapt and will be replaced by new ones. Another big question mark is how the public sector will react, which will end up having a significant impact on the private sector. I suspect that many countries have already chosen a course in monetary and fiscal policy that will be difficult to reverse from, even if they really wanted to.

Even though a significant proportion of investors are worried about the future prospects of the euro zone, I consider myself to be more of a euro-optimist. I believe that the strong side of the euro zone is the so-called weakness of the centre and the lack of a strong-handed leader. No one can push through total stupidity, and Member States must look for compromises that are not the best, but also not the worst.

There are no simple answers to complicated questions. These are currently being sought by those people who have lost their jobs, by those companies whose products and services are being consumed less, and by governments and central banks needing to reduce the risks to public health and the economy. It is often the situations that pose great challenges that force people to make an effort and develop, and get countries, companies and individuals to think more about their personal responsibilities.