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.
In nominal terms, global GDP in 2019 was around $90 trillion; hence the stimulus is of the order of 10-12 percent of world GDP. The details of some packages are complex, some of the numbers have to be interpreted with caution, and in many cases the stimulus is public sector loans or guarantees, not direct public spending. A study published by Bruegel suggests dividing the responses by governments (as opposed to central banks) into three distinct categories (Anderson et al. 2020). These are direct fiscal impulses, deferrals, and guarantees. Even with these qualifications, the magnitude of the public sector effort is notable, yet several dimensions of it warrant closer examination.
The purpose and timing of the various interventions
Starting with their overarching aims, three distinct strands of policy intervention can be discerned, in addition to immediate increases in spending on health and associated care services. These are support from fiscal policy to tide over the consequences of lockdown for households and companies obliged to stop working while the health emergency is paramount; monetary policy action to enable the unavoidable rise in debt to be affordable; and measures aimed at relaunching economies when appropriate.
Furlough schemes and cheap loans or subsidies dominate the first category, but they are costly and will rapidly deplete national treasuries, raising the question of how much fiscal firepower will remain for an authentic “Keynesian” stimulus when the health imperatives abate. In addition, governments will soon have to confront, if they are not already confronting, the challenge of when to turn off economic life support for companies unlikely to be viable in a recovery phase.
Financial stability is a related worry. Loans, unlike grants, will have to be repaid or rolled over, and guarantees could be called. Countries can cope while interest rates remain low and central banks keep the liquidity taps open, but at some stage, inflationary pressures will start to rise, and any action to raise interest rates may precipitate a further round of sovereign debt problems. Similarly, companies with weak balance sheets are likely to become nonperforming loans for the banking sector and, despite the sizable bank recapitalization of the last decade, will test bank viability, especially with low interest rates curtailing their intermediation margins.
A double-edged consequence of the easing of lockdown may be accelerated structural change. On the positive side, the experience of lockdown has stimulated a search for a different economic model, less reliant on travel to work, more receptive to green initiatives, and—at a minimum—questioning whether a high level of international travel can resume. But the flip side is also evident, with many companies teetering on the edge of bankruptcy in the sectors most affected. A wide-ranging transformation may be the outcome, but such transformations inevitably involve major disruption and, as coal miners know only too well, workers displaced from a previously prominent industry often struggle to find viable alternative jobs.
A novel European response
In Europe, initial proposals from the Eurozone finance ministers were for a package of loans with a headline total exceeding €540 billion. The trouble with this approach is that it will aggravate the debt position of already heavily indebted eurozone members, not least Italy, engendering a risk of financial instability. As so often in the past, national and common goals clash.
Plans proposed by the European Commission for a more comprehensive €750 billion EU-wide Recovery Fund encountered entrenched resistance from some of the EU’s northern creditor countries, but were bolstered by German support, foreshadowed in a Franco-German proposal for a €500 billion recovery fund to provide grants to regions and sectors most severely affected by the crisis. After acrimonious negotiations, the headline total stayed at €750 billion, but with grants lowered to €390 billion and a loans component increased to €360 billion. Even so, the collective EU response to the crisis is shaping up to be massive.
The EU level has been criticized in the past for being slow to react and for being unable to marshal resources commensurate with the scale of problems. It contributed little a decade ago. This time is looking very different and has one crucial feature: namely, how it will be funded. It will, for the first time, see the European Commission borrowing from the markets to finance its spending. It should also be recalled that the European Union is a member in its own right of the G20: a stimulus of this magnitude will be welcome well beyond the borders of the European Union.
The pathway out of crisis
There are good reasons to be cautious about the likely evolution of the global economy. To start with, the health emergency is far from over, and, as many countries have found to their cost, infection rates can accelerate alarmingly quickly. In broad terms, the disease has hit Western Europe and North America hard, along with Iran, but with few exceptions, its impact in emerging markets and developing countries has, so far, been limited, although Brazil and India (at the time of writing) are giving growing cause for concern.
A clear danger is of a delayed or anaemic economic recovery. Optimists argue that there is every reason for the sharp decline associated with putting an economy into hibernation to lead to a strong rebound as activities resume: the idea of a V-shaped trajectory, relying on a sense of consumption or investment having just been postponed. A U shape would imply a more prolonged period of stagnation after the initial fall, but an eventual catch-up followed by a return to trend growth.
Certainly, some households and business will have engaged in forced savings because of the lack of spending opportunities and will want to make up for lost time by spending at above-average rates, aiding a strong recovery. But others in both sectors will have had to run down savings because of falling income. For some services, in particular, the idea that the demand is merely postponed is untenable: think of the restaurant meal or the haircut scheduled for a month ago. Consumer wariness may exacerbate this effect.
Another potential influence would be a fresh spike in infections, leading to a further lockdown. If this were to occur, the economy could well follow a W-shaped trajectory consisting of an initial recovery, followed by a renewed downturn, before a sustainable recovery takes hold. As treatments for the virus and the ability of the authorities to contain any new outbreaks improve, these risks should diminish, while success in finding and distributing a vaccine would be game-changing.
However, a specter hanging over the global economy is the possibility of a permanent loss of economic activity if businesses worst hit by the crisis are unable to resume their activity. This would manifest itself as an L-shaped trajectory in which a downward step change in GDP would result in a new starting point. Such an outcome is most likely in economies dominated by personal services, and the effect would be aggravated if the aftermath of the outcome led to an extended continuation of social distancing measures.
The pursuit of “strategic autonomy”: A retreat from globalization?
Repatriation of economic activity rapidly became a central plank of responses to the economic threats (Begg 2020). The future of measures taken to constrain economic openness, ostensibly in pursuit of what has been described in Europe as “strategic autonomy,” will also have positive and negative effects. Policies favoring national economic actors include efforts to reduce dependence on foreign suppliers of products seen as vital, such as medical equipment and chemicals needed as active ingredients for pharmaceuticals; promotion of alternative sources of components for manufactures; and protection of national champions from predatory foreign takeovers.
Measures of this sort tend to be popular with voters, whereas the case for avoiding protectionism, however well founded intellectually, is often hard to sell, and not just to globalization skeptics. But it is undeniable that what is happening today is prompting a reassessment. Reporting to the European Parliament in May on the previous month’s European Council meeting, President Charles Michel revealed that he had “sensed an increasingly shared conviction at this European Council of the need to draw lessons from the past and to restore Europe’s production capacities. I’m tempted to paraphrase the message from the European Council by saying that we should bring back the ‘made in Europe’ label.”
Then, in an open letter to Ursula von der Leyen, a group of former, very senior European Commission officials highlighted Europe’s vulnerabilities to the fragility of key supply chains and expressed concern about Europe losing out from policy responses elsewhere. They claimed: “a series of asymmetries are already appearing to our disadvantage: foreign competitors, particularly in China and the United States, will receive massive subsidies, often without any obligation to repay, unlike in Europe; our European instruments, which should help to level the playing field in international competition, are slower and less powerful than those of our competitors.” Cynics might note the preponderance of French-sounding names among the signatories and recall presumptions of a French penchant for protectionist policies. But there is something more fundamental afoot, reflected in a widespread questioning of the form globalization has taken over the last three decades. Writing just before the pandemic, Aiginger and Rodrik (2020, p. 189) had noted a “demand for proactive government policies to diversify and upgrade economies beyond simply freeing up market.” They advocate a shift away from the prevailing market-oriented philosophy and a restoration of industrial policy. The responses to COVID-19 are accelerating such a shift and tend to be welcomed by citizens, but there has been little discussion of possible drawbacks.
Coordination and institutional capacity
Despite the scale and speed of the policy responses, there is not much evident coordination of global action, and insufficient recognition of how the uncertainties stemming from the virus will affect inter-country linkages and externalities. A lack of coordination is likely to lead a country to do only what is necessary for its own recovery, taking account of other national considerations, and to play down externalities. China, for example, has had a much more moderate fiscal stimulus than a decade ago. According to Jonathan Cheng of the Wall Street Journal, China is reluctant to stimulate on anything like the previous scale because of fears of aggravating an asset price boom, although it could be keeping its powder dry in case the downturn worsens.
Thus far, policy interventions have been predominantly national responses. At one level, this does not matter, provided the fiscal measures are commensurate with the challenge, but measures aimed only at solving national-level problems will be inherently less likely to take account of significant cross-border spillover effects. In economic terms, if there were a rapid spread to countries so far spared, obliging them to lock down their economies, their capacity to respond is going to be less than in advanced countries. The onus will therefore be on international agencies, notably the IMF, to provide support, and the Fund will be likely to require a sizable increase in its capacity.
Increasingly dysfunctional global governance is, however, evident in a proliferation of bilateral disputes, the United States abandoning the World Health Organization after claiming it was too understanding toward China, the head of the World Trade Organization resigning, unseemly attempts to purloin vital health-care supplies, and a lack of global leadership. There has also been a conspicuous lack of leadership through the G7 or the G20, although the G20 acted quickly to boost the resources at the IMF’s disposal. The IMF also seems to have been quick to prepare and not to have been shackled by partisan national interests. These may, though, be early days for the Fund: by June 29, it revealed that it had received “an unprecedented number of calls for emergency financing—from 102 countries so far” (IMF 2020). Grants for debt relief had been approved for 27 countries through its Catastrophe Relief and Containment Fund, originally set up to assist with the Ebola outbreak in West Africa in 2015 and since revamped. Overall, more than 70 countries had been accorded financial support, agreed “at record speed.”
An imminent litmus test of international cooperation may well be the governance of efforts both to find and to distribute a vaccine for COVID-19. Government posturing about giving their own citizens preference, either because they provide the funding for the research or because it is “their” company leading it, is not auspicious. However, the London Global Vaccine Summit hosted by the United Kingdom (but held virtually) on June 4 is more encouraging, if on a relatively modest scale. It elicited pledges of some $8.8 billion for vaccine programs for the Global Vaccine Alliance (GAVI) to be able to immunize up to three hundred million people. The summit saw pledges not just from richer countries, but also from some of the world’s poorest nations, alongside contributions from the private sector, notably the Gates Foundation, although it is unclear how much of this is genuinely “new” money. It nevertheless serves as a positive example.
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.
Iain Begg is professor at the European Institute and academic co-director of the Dahrendorf Forum, London School of Economics and Political Science.