Rescuing the economy from COVID... and mismanagement

10 March 2020 – Jorge Núñez Ferrer

All member states are scrambling available tools and creating new ways to rescue the economy. The discussions are on trillions of Euros with discussions of where to place them. My work over the last two years took me into the workings of public accounts, public financial management and public procurement

Clearly member state governments (like most governments around the world) have important and urgent priorities. These do not match, the important priorities are often delayed and avoided (they may not be very popular, thus “not urgent”) and when urgent action is needed, the important are again not seen as urgent. The problem often is that the important decisions are often key for managing better the next urgency (crisis).

Avoiding important reforms likely deepened the financial crisis, taking urgent “rescue” actions in the crisis while delaying important reforms, will likely deepen the crisis expected in the aftermath of COVID. Can we afford another round? How much bending is possible? The art of overcoming crisis often relies on the art of building overall resilience, like a healthy immune system in the human body. Once a body gets stricken by a disease, the past health blunders will affect the recovery time.

In this blog I would like to mention two apparently boring but essential aspects for a more resilient better managed crisis:

a) the way public accounts are reported and finances are managed

b) how public procurement is done

On public accounts and financial management: Member state governments have grown to a level where their expenditure reaches 50% of GDP. We would naturally expect the government to apply the highest accounting and management standards, so as to ensure the best socio-economic and sustainable actions are taken. 

Unfortunately, most member states (and most countries in the world) do not have balance sheets in line with international public financial standards, are not transparent in the valuation of the public assets and do not publish public accounts in a manner useful for judging the impact of decisions. It has been estimated that public accounts in member states often fail to identify and value approximately 60% of assets and liabilities, i.e. the non-financial assets and non-financial liabilities (see page 23 of of the presentations to the European Parliament on the Euro Area stability). 

This has severe repercussions on public trust, trust within the Eurozone between states and from citizens, as well as trust from the financial markets. Recent work of CEPS “Beyond Public Debt” (a shorter intro here) presents how the lack of proper standards and management led to the financial crisis, a questionable response and then to a week recovery. The problems caused by weak public accounting standards has been raised by the IMF, presented in the excellent book “The public wealth of nations” by Dag Detter and his many subsequent. It is not outlandish to infer then that this is also aggravating the situation with COVID. Governments should have acted on this and still should do their homework to create better value to society and manage public accounts better. Allowing them also to improve their debt sustainability and avoiding a worsening of the situation in the future.

On public procurement: I had the pleasure to be awarded the drafting of a short overview for the European Parliament on public procurement and their role to achieve the climate objectives. Public procurement has a significant impact on the economy and on the private sector. Due to its size, approximately 15% of the EU’s GDP (part of the 50% mentioned above), its impact on the economy is large. But procurement practices often lack professionality and do not apply proper lifecycle cost and impact assessments in decisions, nor are the practices able to take in innovative ways to produce (such as circular economy approaches). There is a lack of proper pre-commercial procurement for innovation or green procurement approaches. Governments need to finally accept that they have to apply high standards, they represent a massive commercial and economic operation and should operate better to deliver value in social and economic terms.