The deepening economic crisis triggered by the coronavirus pandemic has elicited extensive policy responses, but also raises daunting challenges for global governance. This policy-oriented article explores the new challenges for multilateralism, assesses efforts to coordinate these policy responses, and considers likely outcomes.

## The Background to an Unprecedented Policy and Governance Challenge

Economic downturns are a regular feature of advanced capitalist economies but arise for diverse reasons and have differing trajectories (Reinhart and Rogoff 2009). In the late 2000s, what started as a manageable problem with subprime lending in the United States evolved into a much more severe financial crisis. In Europe, recovery was derailed by the eurozone sovereign debt crisis and saw an extended period of stagnation, but the various policy mistakes at the time had many familiar features.

What is so distinctive about COVID-19 is that the downturn is the result of deliberate policy choices. For health reasons, economic activities requiring close personal contact were put into “hibernation.” At a stroke, steady if unspectacular global growth became a sharp decline in GDP, and the likely trajectory of economies after the second quarter of 2020—the period of most severe lockdown in the advanced countries—is highly uncertain.

This article starts by reviewing the economic outlook and comparing it with the financial crisis of the late 2000s. It identifies and examines a number of major challenges for global economic governance, including when and how to ease lockdown, the difficulties in coordinating a global policy response, and the longer-term consequences for the international order in light of policies aimed at bolstering “strategic autonomy.”

## The Economic Outlook: Now and Then

In an interview for Bloomberg Markets, Carmen Reinhart and Ken Rogoff, whose book (2009) had a title dripping with irony—This Time Is Different—suggest the current downturn is, indeed, very distinctive. They point to two key features: the speed with which the crisis has struck and the previously unimaginable extent of the lockdown. They also stress the likely asymmetric nature of the shocks hitting the global economy, expressing fears, in particular, for a number of middle-income emerging markets, those heavily dependent on oil revenues, and Italy.

A corollary of what they say is that there is great uncertainty about what happens next. Standard forecasting models are ill-equipped to generate useful projections about the likely trajectory of the economy, although successive forecasts from mainstream international bodies have become more pessimistic. Thus, the June 2020 OECD Economic Outlook(OECD 2020) proposes two scenarios, neither of which is as optimistic as recent projections from the IMF or the European Commission suggesting a global decline in GDP of at least 3 percent. In the more favorable scenario, large divergences are expected among European countries, partly as a result of how the health emergency was handled, but partly also because of differing economic structures, notably the reliance of the economy on tourism or private services.

In presenting its latest, downbeat economic assessments, the European Commission argued that the economic shock from COVID-19 is “symmetric in that the pandemic has hit all Member States” yet also noted the sizable differences in the projected GDP loss in 2020 and, perhaps more significantly, the prospects for a rebound in 2021. A key observation concerns the interdependencies between EU members: “given the interdependence of EU economies, the dynamics of the recovery in each Member State will also affect the strength of the recovery of other Member States.” This interdependence is also salient at the global level.

However, as Odendahl and Springford(2020) rightly stress, COVID-19 cannot be regarded in economic terms as a “symmetric shock,” even though it is one affecting all European countries. They highlight the differences among countries in the intensity and likely duration of the lockdown, divergences in the vulnerability of key sectors of the economy, and disparities in the capacities of governments to respond, partly reflecting underlying fiscal sustainability.

Although today’s economic crisis is distinctive, its global nature is far from unprecedented. In the late 2000s, what started in the United States as a relatively limited problem in the subprime mortgage market rapidly spread to other advanced economies. It had less of an effect on other parts of the world. Nevertheless, according to the IMF database from 2010, global GDP growth slowed from 5.3 percent in 2007 to 2.8 percent in 2008; then global GDP declined by 0.6 percent in 2009 (subsequent revisions paint a slightly more positive picture), before recovering to 4.8 percent growth in 2010.

Faced with this rapid decline in economic activity as the financial crisis spread after the collapse of Lehman Brothers in September 2008, governments had to reinforce the action taken by central banks to support the financial system. Prior to the crisis, the G8 (reverting to the G7 after Russia was expelled in 2014) had been the informal forum for global governance, but this was broadened to the G20, composed of nineteen countries with the European Union also sitting at the table.

After some initial hesitation, the G20 acted rapidly and decisively. At its London meeting in April 2009, the G20’s leaders agreed on a coordinated fiscal stimulus and other actions, with one contemporary account (by Persaud 2009) praising the influential role played by Gordon Brown. According to the OECD, in an assessment of the effectiveness of fiscal stimulus (OECD 2020, chap. 3), the average fiscal stimulus of advanced economies was 2.5 percent of GDP—higher in the United States, lower in some of the more indebted European countries.

China, despite little impact of the crisis on its growth, and a number of other Asian countries accounted for the largest packages (as a share of GDP) in this period, followed by the United States. In Europe, however, the fiscal effort was more moderate. Moreover, the European Central Bank, although prepared to inject plenty of liquidity into the system in a series of measures starting as early as 2007, was slow to follow the lead of the Federal Reserve or the Bank of England in launching quantitative easing.

## The Economic Policy Challenges

The challenge to policymakers now is both daunting in scale, surpassing what they had to contend with in the late 2000s, and unlike what they have encountered in living memory, and there is a cruel paradox at its heart. Putting substantial parts of the economy into hibernation to contain the spread of the virus is accepted as the correct health policy, but conventional and well-tried economic stimulus packages—by design—have a contrary effect of aiming to restore economic activity as expeditiously as possible.

Nevertheless, heeding the lessons of a decade ago, governments have been quick to respond. Similarly, central banks have cut interest rates—effectively to zero in many jurisdictions—and announced massive programs of quantitative easing intended to ease the burden of existing debt, and some have offered liquidity support loans to companies. In the eurozone, however, this is trickier because of treaty constraints and constitutional considerations, the latter above all in Germany, where a court ruling could limit the actions of the European Central Bank.

A first tricky decision, already preoccupying many governments, is how soon and how extensively to lift the lockdown. Thus far, health policy has been uppermost, with the focus on slowing the spread of the virus and ensuring that health systems are not overwhelmed. As infection and hospitalization rates drop, the hope is that R0, the parameter epidemiologists use to measure person-to-person transmission, will stay below 1, meaning the disease should gradually fade away. However, caution is needed to avoid a fresh spike in the incidence of COVID-19 before vaccines or antiviral treatments offer a better solution, and there is a risk from allowing other routine health care to be crowded out.

More worryingly, to recycle an expression from the financial crisis, there is a potential “doom loop” connecting health problems with a sharp fall in economic activity. The effects of lockdown on mental health are already being recognized, leading Keir Starmer (recently elected as leader of the British Labour Party) to warn about the damaging effects on mental health (Starmer 2020). In the same vein, many articles in the press have referred to growing delays in treating other health conditions, notably cancer referrals.

In addition, there tends to be a correlation between poverty or social exclusion—both set to increase rapidly as the economy shrinks—and a number of chronic health conditions. This correlation is explicitly recognized in the Sustainable Development Goals and elicited a warning from the United Nations about a reversal of progress toward attaining them. Harsh though it may sound, if an economy continues to shrink, there will be excess deaths (Department of Health and Social Care, Office for National Statistics, and Government Actuary’s Department and Home Office 2020). At some point, the tragic lines on charts showing the trajectory of COVID-19 infection and fatalities will be overtaken by lines showing indirect victims of the virus.

The second main policy challenge is to find ways of enabling businesses to weather the storm, households to obtain enough income to compensate for inactivity, and more resources to be allocated to health, all at the same time as anticipating how to engineer an economic recovery. By so doing, the policy objective is to minimize the economic damage it does. While lockdown lasts, businesses burn through their working capital, workers and the self-employed lose jobs and income, investment is put on hold, and the public finances deteriorate at an alarming rate. Economic actors are used to occasional shutdowns, such as when a factory is refitted, when faced with lengthy strikes, or during periods of extended holidays. But in contrast to the extensive current restrictions, these are usually either well planned or affect only a small segment of the economy.

Third, the COVID-19 economic challenge is global and will require careful policy coordination. So far, the impact of the virus has been most pronounced in Europe, North America, and a few other countries, but as it spreads to developing countries, which are less able to meet the costs, there will be demands for support mechanisms. Kristalina Georgieva, the IMF managing director, reported having received inquiries about emergency financing from more than half the organization’s members by mid-April 2020, and in a document covering questions and answers, draws attention to the variety of instruments the IMF is able to deploy and how they have been reinforced (IMF 2020).

The distributive consequences constitute a fourth policy challenge. Who pays, who forgoes income, how will vaccines be funded and delivered, can there be extensive debt relief, and how will legacy problems be managed? The incidence of the lockdown is intrinsically uneven, both because its effects differ so greatly between different sectors of activity and because of how it will transform the economy of the future. In Germany and at the EU level, for example, the ambition is to use the recovery to promote a greener economy.

Then there are the longer-term effects on different parts of the world, and the implications for global governance. When China first went into lockdown, many expected COVID-19 to emulate SARS by being contained, with little spread to other countries. Once it became a pandemic, recriminations proliferated: the World Health Organization has been accused of being too lenient on China; threats to seek reparations from China have been articulated; and China, unsurprisingly, has responded aggressively. This is not a recipe for sound global governance.

## The 2020 Policy Responses and What Happens Next

Once the extent of the health crisis became apparent, governments and central banks were commendably quick to put in place extensive monetary and fiscal policies to deal with the economic crisis. According to the IMF, in its online policy tracker, more than US$9 trillion of fiscal policy intervention had been announced by May 20, of which$7 trillion was from the G20 countries. The latter figure is now higher following an announcement of additional measures in several countries and is set to grow further now that, for the first time, EU leaders have agreed on a collective package worth €750 billion.

## Conclusions

Economic crises as severe as the present one require, and are eliciting, comprehensive action, but typically also precipitate change in economic relationships, approaches to regulation, and, sometimes, established norms and practices of governance. The massive policy responses, especially in Europe—with Germany arguably doing the most—have provided invaluable shielding for vulnerable economic actors, but there will be a delayed day of reckoning when loans have to be repaid and governments have to rein back labor market subsidies.

Even before the crisis erupted, multilateralism had been called into question by the aggressive stance of the current US administration toward not only China, but also other trading partners and the institutional structure of global governance. David Frum is scathing, arguing that “the Trump administration has poisoned American relationships with almost every historical U.S. ally, to the point where it’s a question whether these relationships can still meaningfully be described as alliances at all” (Frum 2020). He is also critical of China, and his concerns about a retreat behind national borders relate not just to the economic impact but also to a heightened risk of conflict.

With the WHO now joining the World Trade Organization on the US hit list, the G7 stalled, a lack of clarity about the G20’s role, and a proliferation of unseemly disputes about assigning blame, the unavoidable conclusion is that global governance is facing turmoil at a time when it is increasingly needed. It could be a time of opportunity for Europe to show global leadership. The largest fiscal stimulus packages have been announced by European countries and have been complemented by action on an unprecedented scale by the EU level of governance.

However, considerable risks remain. Relatively low infection rates in some of the developing world may be because of different susceptibilities to the virus, but a more worrying scenario would be if they reflect lags in transmission, implying a further spread of the pandemic in countries with health systems less able to respond and governments unable to manage the risks. In this regard, developments in Latin America and India are not reassuring, and the current low rates in many poor but populous African and Asian countries could portend new problems. The IMF may have been able to cope so far, but could it deal with a surge in calls on its lending and support instruments?

Just as the trajectory of the virus will need to be monitored with care, renewed risks of economic contagion must be anticipated. China, South Korea, Europe, and North America had the capacity to cope, though for many countries, some of the more difficult consequences are still to arise. But international support on a possibly unprecedented scale is likely to be needed if poorer parts of the world are next to be affected.

Europe, too, now has to revisit its approach to “strategic autonomy” in the light of COVID-19. It will have to examine the trade-offs between undue dependence on others, especially China, and the gains from the international division of labor. The tensions are evident, whether in relation to access to vital health equipment and drugs, or ownership and control of major companies. Timing is also crucial. Countering a steep recession calls for rapid action, but Europe also wants the recovery to usher in a new economic model characterized by being “green” and “digital.” These orientations are beguiling. However, they must not overlook the dangers of disruption associated with profound structural change, which creates new classes of winners and losers.

A forceful plea for global action was issued by the former prime ministers of the United Kingdom and New Zealand, Gordon Brown and Helen Clark, along with Erik Berglöf and Ngozi Okonjo-Iweala, and endorsed by many other prominent leaders (Berglöf et al. 2020). They assert that “the consequences of not acting now would be felt for the rest of the decade” and stress the necessity of a globally coordinated response.

Globalization has undoubted faults, and those close neighbors in Geneva, the WHO and the WTO, need urgent reforms. But as Pascal Lamy (addressing the June 9, 2020, high-level conference organized by the China Center for Globalisation on “International cooperation in times of Covid 19”) recently argued, “the Covid crisis is not a failure of globalism, but a failure of localism.” Fragmentation and discord in global governance are not an answer.

### Author Biography

Iain Begg is professor at the European Institute and academic co-director of the Dahrendorf Forum, London School of Economics and Political Science.

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