This is just the first in a series of cascading crises
Even as we are just beginning to confront the magnitude of the shock caused by the covid-19 pandemic, we need to wrap our minds around a painful truth. We are in the early stages of what is going to become a series of cascading crises, reverberating throughout the world. And we will not be able to get back to anything resembling normal life unless the major powers can find some way to cooperate and manage these problems together.
The first phase has been the health-care crisis in the world’s major economies. The next phase is the economic paralysis, the magnitude of which we are only just beginning to comprehend. In just the past two weeks, the United States lost some 10 million jobs, exceeding the 8.8 million total jobs lost over 106 weeks during the 2008-2010 recession. But this is only the beginning.
Next up will surely be the danger of countries defaulting. Italy entered the crisis with the highest level of public debt of the euro-zone countries, and the third-highest in the world. The country’s debt will skyrocket as it spends money to combat the economic fallout from covid-19. Italy has the third largest economy in Europe, but it is only one of many European countries that will face a fiscal breakdown. And this will happen at a time when Europe’s most dynamic economies, which often provide the money and guarantees for bailouts and support mechanisms, are themselves underwater. Germany, which has not had a full-blown recession in some 40 quarters, now expects its economy to contract by 5 percent this year.
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Next come the explosions in the developing world. So far, the numbers of infected have been low in countries such as India, Brazil, Nigeria and Indonesia. The likely reason is that those countries are less linked by trade and travel than the advanced world. These countries have also tested very few people, which is keeping their numbers artificially low. But unless we get lucky, and it turns out that heat does temper the virus, these countries will all get hit — and hard. All of them are cash-strapped, and the loss of tax revenue, combined with the need for large new subsidies, could easily tip them into their own versions of the Great Depression.
And then there are the oil states. Even if the quarrel between Saudi Arabia and Russia gets resolved, at this point, demand for oil has collapsed and will not soon recover. An industry insider told me his firm is forecasting that oil will likely drop to $10 per barrel and stay there. Consider what this means for countries such as Libya, Nigeria, Iran, Iraq or Venezuela, where oil revenue makes up the vast majority of government revenue (often of the entire economy) — but they make a profit on oil sales only at prices of more than $60 a barrel. Expect political turmoil, refugees, even revolutions, on a scale we have not seen for decades — not since the last phase of $10 oil, when the Soviet Union collapsed.
The world has entered this pandemic with two challenges. It is awash in debt — government and private. With a total global gross domestic product of $90 trillion, public and private debt add up to $260 trillion. The world’s two leading economies, the United States and China, have debt-to-GDP ratios of 210 percent and 310 percent, respectively. This would be more manageable if not for the second challenge. This crisis is occurring at a time when global cooperation has collapsed and the traditional leader and organizer of such efforts, the United States, has abandoned that role entirely.
Last month, the Group of Seven meeting was not even able to issue a joint statement because the United States refused to sign anything that did not label the disease as the “Wuhan virus” — a dispute that sounds like something out of high school. The centerpiece of any global effort would have to be close cooperation between the United States and China. Instead, the relationship is in free fall, with each side deflecting blame on itself by blaming the other. The follow-up Group of 20 gathering was also a dud. Even the European Union has been late to recognize the seriousness and scale of the pandemic. A rash statement by the head of the European Central Bank caused Italy’s worst stock market crash in the country’s history.
What would be achieved by greater global cooperation? Since so much of the containment strategy involves travel, it would be far more effective if travel bans and advisories were coordinated. During the 2008-2009 recession, central banks and governments worked with each other, helping to contain and dampen financial contagion. Without some assistance and coordinated effort, countries such as Iraq and Nigeria will explode, which will likely mean the spread of refugees, disease and terrorism beyond their borders. If the richest countries pool funds and share information, that will speed up the arrival of treatments and vaccines. And when the time comes to reopen economies, coordinated action — on trade and travel for instance — would give us all the biggest bang for our buck.
The problem we face is broad and global but, unfortunately, the responses are increasingly narrow and parochial.
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