The Covid-19 health crisis is in the process of causing an economic crisis, but is it even an economic crisis, to begin with…? If we look back in history, we will see crises emanate from economic and/or financial events, such as the burst of the tech bubble in 2001 or the bust of the mortgage market in 2008. None of this is relevant now. Only 3 months ago global economies were humming along just nicely, or at least most of them did.
The crisis this time is being caused not by economic or financial disequilibrium as we have learned to be the case in textbook economics, but by politicians’, bureaucrats’ and scientists’ reaction to the virus breakout. Think about it… It was they who called for isolation and social distancing. It was they who closed schools and universities, retail shops, restaurants, and production facilities. Much of the entire service sector globally has been brought to an abrupt standstill.
To a large extent they decreed transactions no longer to be permitted, travel to be banned, and for life as we knew it to stop literally overnight. Governments have interfered with private businesses and prohibited their normal and rational conduct, something that makes this crisis unique and not seen in history ever before. We can therefore not realistically estimate how deep this recession will be in the end. This is no doubt the pinnacle of uncharted waters in our lifetimes.
What is not helping us with all this that the world had zoomed in on a globalisation effort making the economic processes maximally efficient. This means that supply chains have been snaking across the world and all of our successes have deeply depended on the undisturbed movement of goods and people. It is therefore a double whammy to see the global value chain come to a halt and impact every singly corner of the world.
As a result, governments quasi-nationalised large swaths of their economies, particularly in Europe but also in America. People who cannot work due to the shutdown are being supported with continuing payments in lieu of wages, enterprises that are prohibited from running a business are being bailed out or at least financially bridged into a better scenario that is hoped for down the road in 2-3 months time. Tax payments are being deferred to alleviate their burden.
Not to be misunderstood here, it is governments’ prime objective to care for the safety of their citizens, whatever it takes, or so numerous of them are on the record saying. And this probably had to include following scientists’ and health experts’ advice and impose isolation and social distancing rules, even at the expense of endangering and in many cases shutting off the very lifeline of our society’s being, namely the underlying economic processes that secure our daily existences.
Only history will tell whether the nationalisation of everything was necessary, or whether politicians acted in good faith but ended up edging their countries and possibly the entire world into utter disaster. Not that our leaders don’t know their history, but none of them has had the benefit of experiencing the short-sightedness and tragic mistakes of their predecessors. Neither of them has actually lived through a pandemic. The most recent but long-forgotten flu-like ones happened in 1957 and 1968.
Well, it is what it is, and governments have reacted to the threat in their own politically correct way. The much larger question to be answered is how we will recover from the crisis induced by them, and what the world will look like going forward. Will we enter a period of accentuation or attenuation? Pundits seem to agree that the crisis requires a globally concerted response, but how is this even conceivable in an era of resurgent nationalism and America First?
Will populism rise far beyond current levels, or is there still a chance for a new form of globalism? Is it imaginable that nations like Japan, China, Russia, Germany, UK, and Brazil cooperate at a high level to avert financial meltdown amid soaring government debts, for them to be joined by America in the case of a Biden win? Or are we already on our path down the rabbit hole of populists like Salvini & Co who will respond to their constituencies and inflict incredible damage.
It is hard to think of China and America to find common ground any time soon, if ever. Washington needs a culprit for the health crisis, to paper over their own shortcomings to address the outbreak. The verbal assault on Beijing has long begun, and the election campaign will no doubt be laden with ugly rhetoric. Allies are already being mobilised, such as the UK and Australia, in an attempt to top every previous containment effort and outright isolate China in the international community.
Also, we have to be clear in our minds that the loss of say 20% of global GDP has to be compensated for by governments, from social and unemployment expenses to all sorts of bail-outs to equity stakes in capital-deprived enterprises. Public debt will inexorably and dramatically rise and push the capacity limits of carrying it, beyond them for many. And who is to say that, were things to go back to a normal state at one point, that they would divest their stakes in the private enterprise landscape again?
Could this be the end of neoliberalism and any concept of the small state? Will we go into the opposite direction from here and adopt a different kind of economic structure practically led by Bernie Sanders principles? Such an effect will probably be less felt in Europe than in America, as European nations have long been built on state-provided health care, education etc. History surely didn’t get it right for Sanders, but will he become immortal by way of political necessities in the future?
Naturally, there will also be winners, and we are seeing some of their share prices making all-time highs. Look no further than Amazon which is transforming itself into the network keeping America afloat and incessantly expanding its share of the economy. And big US pharma is holding all the cards on the vaccine. The problem, however, is that governments in the West will be torn between how to safeguard them as beacons of hope and their instinctive urge to regulate if not break them up.
It is impossible to predict where we will come out on the other end, but the world is likely to become a very different place. This year and next, East Asia will command the best economies globally, as they are emerging from the health crisis first and not least by way of them becoming entirely tech-driven. America will eventually also re-emerge intact, helped by its tech businesses and the pharma behemoths thriving on the continuing fight against corona, but at what cost…
I fear for Europe, though. Their industrial policies have missed the tech tsunami, and the once-mighty manufacturing sector already finds itself in gradual decline. There is every chance in the book that they will get the bailout of the periphery wrong which could end up in the unwind of the EU and its potentially very dire consequences. In any case, corona is altering our geopolitical and systemic foundations beyond repair, and only fools will dismiss the need to brace before a grave new world in the making.
