Pandenomics. A state of war
The year 2020 is a strange year, in which all sorts of signs in the sky and on land have heralded disasters and extraordinary events. The winter was so mild that the oldest people could not recall a similar one. Chroniclers of the period mention that the infection came from China. In the summer, there was a major eclipse and, shortly afterwards, a comet appeared in the sky. In Rome, a grave and fiery cross in the clouds were also seen above the city, so fasting and alms were offered, as some said that the plague would destroy mankind. The fire consumed the Pripyat forest around the sarcophagus of the Chernobyl reactor… Paraphrasing Henryk Sienkiewicz, this is what a literary interpretation of this year’s events could look like.
However, the coronavirus pandemic is just the beginning and not a story to cheer our hearts. The virus has reshaped how we think about the economy and society. Most countries’ governments had to put the economy into hibernation to protect people from the disease, which we have not encountered before.
To handle the pandemic’s repercussions, these governments had to “dig up” economic textbooks from during the war and countries’ reconstruction after the First and Second World War, as well after natural disasters.
At the Polish Economic Institute, we have termed this set of tools – which is similar in many countries but varies according to circumstances, such as financial capabilities – the “pandenomics”. This is the set of norms and rules that apply to the production, distribution and consumption of goods and services during the pandemic.
The pandenomics constitutes a different type of rules that need to be applied when confronted with a health-related challenge, rather than an economic one. This term could also accelerate changes in how we think about the role of the state, consumerism and realism in international politics.
Simply put, this problem is often described using the philosophical dilemma of a switch on tram tracks, which we can use to choose whether to save the economy or people – except the tracks are connected and we have to decide which will be run over first. The economy and then society will suffer because of the economic crisis, or society will start dying, which will affect the economy.
Most countries chose to have “the tram run over the economy”, which will have a negative impact on society in the medium term; for instance, by increasing unemployment. Yet Spain’s experience of the pandemic shows that, in the long term, the regions that introduced a lockdown managed better.
It will be bad with a chance for improvement or very bad
.Every day, the media publishes reports on the shock to the global economy. Over half of global GDP is generated in countries under lockdown. The breakdown of economic activity is worse than during previous recessions. Many sentiment indicators show that services and production in Italy and the Eurozone are under extreme stress. Global demand for oil has fallen by as much as one-third and the number of new cars and parts sent to the US market has fallen by 70%. The World Trade Organisation (WTO) forecasts that the coronavirus pandemic will lead to the biggest drop in international trade since the Second World War.
At the start of April, the WTO presented two scenarios for global trade in the years ahead. According to the optimistic scenario, turnover will drop by 13% this year and increase by 21% next year. Global GDP will contract by 2.5% in 2020 and grow by 7.4% in 2021. This scenario assumes a worse course of events that during the financial crisis in 2009, when international trade fell by around 12% and global GDP contracted by 2%.
According to the WTO’s pessimistic scenario, global trade will fall by 32% this year and grow by 24% in 2021. Global GDP will contract by as much as 8.8% this year and grow by 5.9% in 2021.
Many companies have enough reserves and cash to survive 3-6 months. The way out for those that survive will be uncertain, featuring anxious consumers, alternating between limiting and increasing output, and new, difficult health protocols.
This all looks like the end of a certain era. It might be, but this will be for historians to judges. Like the interwar years of the 20th Century, they might consider 1989-2019 a “golden age” (to echo Marcin Piątkowski). May the next one be a “silver age”, at least.
A Justinian moment
.For historians, the reign of Emperor Justinian the Great marks the end of antiquity and the start of the Middle Ages. As ruler of the Eastern Roman Empire in 527-565, Justinian reformed the administration, the law and the army. He made an enormous contribution to the development of construction and infrastructure in Byzantium; the Hagia Sophia was built during his lifetime and on his initiative, among other things. More importantly, he wanted to restore the Roman Empire’s former glory. He was the last emperor who can be described as “great” – he managed to conquer Italy, Spain and North Africa. This was the peak of his achievements, though, because the reinvented empire, with the reformed legal and education system he created, collapsed after his death. In 541-542, the population of Byzantium was decimated by the “Plague of Justinian”. It killed 25 million people (Justinian caught it, but recovered), destroyed entire cities and reduced the birth rate for decades, all this when Justinian’s soldiers restored the old empire’s borders.
The perturbation for Justinian can only be compared to the later “Black Death” that closed an era that also began with a pandemic (it was the same bacterium, yersinia pestis). Unaffected, China was able to develop without interruption, which resulted in a higher level of social development than in the West from roughly the 4th to the 8th Century. After these events, the Roman Empire only controlled Greece and Constantinople, to collapse after twenty centuries. No “Second Rome” was created or survived. The centre of political and economic gravity in the West shifted to Europe, which was developing very slowly. Political and economic systems, as well as inventions, were much less advanced than during the empire. If Justinian had managed to restore Rome’s power, who knows what the world would look like now.
Today, we seem to be approaching this kind of perturbation. However, we are coping much better with the “plague” of our times, COVID-19.
After the many epidemics, and even pandemics, that ravaged the world in the 21st Century, this one is affecting almost every aspect of our lives (especially in the rich West).
Moreover, in the richest countries, the rate of economic growth has been falling for many years. It is more difficult to achieve significant increases in productivity in economies based on services. In this group of countries, average GDP per capita growth was 4.1% in the 1960s, 2.6% in the 1970s, 2.4% in the 1980s and 2.0% in the 1990s. In the first decade of the 21st Century, it was 1% and in the next – if the recession in 2020 is similar to the one 12 years ago – it will be 0.8%. Many economists have started talking about the end of economic growth, the depletion of natural resources and destruction due to irreversible climate change.
If we fail to cope with the pandemic and its repercussions then – like Justinian – we will leave behind a bright period from a historical perspective, but the fate of the West could be similar to that of Byzantium. It will not be a spectacular fall but, rather, an undermining of strength that will cause a certain order to crumble.
The 12 hands of the pandemic clock that have moved us into different realities
This order can be illustrated using the 12 hours on a clock, symbolising key areas of social and economic life that we will have to manage changes in.
.The consequences of the Black Death, which is often mentioned today, were huge and wide-ranging. The most important effect did not take place until over 400 years later. The Black Death killed people in 1347-1351, and earlier in Asia, which it came from. Nobody counted the number of victims precisely and, as we know, fear tends to magnify. Between 75 million and 200 million people died, according to estimates. An indirect consequence of the pandemic was the industrial revolution. There was a shortage of labour in rural areas so, to protect landowners’ interests, King Edward III banned people from moving around the country and introduced laws preventing wages and prices from rising. This led to revolts. Eventually, mobility grew to a previously-unimaginable level. Rigid social divisions began to blur and the conditions for the creation of what is now known as the middle class emerged. The Black Death accelerated the end of the feudal system and started the changes that led to the industrial revolution in England. It would still have occurred without the plague almost half a millennium earlier, but it would not be the same industrial revolution that we learned (and continue to learn) about.
It is difficult to say whether the crisis triggered by COVID-19 is a disruptor of the world’s path of development or a catalyst. It is too early to tell. The coronavirus will certainly accelerate certain changes. This could be the case with global protectionism, which has been growing for years, or shifting the production of certain goods back to the West. For now, this article offers a cautious selection of the areas that could be affected by the pandemic.
History reminds us we should not be overzealous in predicting rapid changes and sudden progress as a result of an unexpected impulse, but COVID-19 will plant the harvest that we will reap.
.Social distancing is a new trend in our lives that involves maintaining a safe distance from others to reduce the spread of the coronavirus. It is a living social experiment in which many countries decided to close their borders, some shops, limit church services, ban movement and order people to stay at home. The lockdown covered one-quarter of the world’s population. In some societies, the ways used to get people to #stayhome were truly bizarre, like in Indonesia, where people dressed up as ghosts to frighten those who wanted to leave the house.
As well as the numerous jokes about it, the lockdown includes traumatic experiences linked to domestic violence, lack of contact with others and, potentially, post-traumatic stress disorder (PTSD), which can develop among people who take in all the information on the threat of catching the virus, the number of fatalities and funerals, but also bankruptcy and layoffs. For many people, this is a truly risky situation and, unsurprisingly, a source of concern, anxiety and stress.
People have also had to limit contact with others – but we are social creatures, constantly in motion, talking to and meeting with others. Out of necessity, this has been replaced with contact over the phone, on social media, and so on. For many people, this is not enough, though.
Over the course of our lives, we shake hands 15,000 times on average and carry 3200 different bacteria on our hands. With the spread of the coronavirus, we have had to abandon this gesture to make it more difficult for the virus to spread. Yet the handshake is such a strongly-rooted habit in our society that it is unlikely to be replaced by, say, touching elbows or nodding at each other.
The pandemic and its repercussions have deprived us of the ability to meet higher-order needs. Philosopher Grzegorz Lewicki rightly notes that “you are not designing the career of your dreams in your head when you are dying of fear or hunger”. The epidemic has reduced us to beings who think about food, toilet paper, water and reproduction. Yet nothing can reduce the tension, fear and stress. The need to feel safe will influence people’s choices, political decisions, and investment strategies and careers.
The disruption of individualism and consumerism means that our world – so far away from the era of the Spanish Flu or other illnesses that never reached the US or Europe – has become much less stable. Courses for surviving the apocalypse and preppers’ movements, involving building bunkers and hoarding food in case the world ends, could become part of Transatlantic identity.
The pandemic means that consumption is no longer key. Survival is more important.
When our lives and health are threatened, we will allow governments to create a system mapping our behaviour – after all, it will be created for our safety. This is how existing apps monitoring contact between people or checking on us during quarantine function. Shoshana Zuboff calls this new social model “surveillance capitalism”. Homo oeconomicus has become homo securitas. The question is: will he still be a free man?
.Many experts on the labour market repeat that this is the moment when working remotely will become popular. The lockdown has forced many companies to move to working from home. In China alone, this has covered over 200 million people. According to the US Department of Labor, 29% of employees could work remotely, but last year just 16% were doing so. In the EU, 5.2% of people with permanent jobs were working remotely, on average. The countries with the highest percentage included the Netherlands (14%) and Finland (13.3%). In Poland, 4.6% of employees work remotely and we now know that this percentage could be significantly higher while maintaining the same effectiveness.
This challenge will apply to people who are not laid off due to the pandemic. During the first few weeks of it, over 20 million Americans lost their jobs. A few hundred thousand Norwegians were laid off; the situation was similar in France, Denmark and Poland, though on a significantly smaller scale. The strict employment rules in Poland ensured that people kept their jobs, but in countries with very flexible labour laws, unemployment grew sharply. In almost all these countries, the state had to take on the role of the employer to secure jobs and subsidise salaries.
Governments have never had to fight for companies’ liquidity and jobs to the same extent, not even during the financial crisis of 2008, if only because they caused the problem themselves by restricting movement and consumption.
.If, for every idea to develop the education system even a cent were spent on developing it, it is likely that no country would struggle to pay for teachers and teaching aids. Yet this is not the case, because reforming education systems is exceptionally complex and the political benefits are not felt until later. The fact remains that, in every country, education and teachers are subject to accelerated digitisation.
Before the pandemic, many countries that were modernising their education systems and using teaching aids were playing with technology; now, it has become a necessity. Until recently, the education process looked much like it did in the 19th Century. Parents sent their child to school, were able to go to work and occasionally were in contact with the school. They checked homework or helped their child do it. Now there is no teacher who will explain the topic. Pupils must learn independently, using solutions that are often imperfect, because consumers are ready to pay significantly more for a new game than for a comprehensive teaching system. More often, the teacher must be replaced by parents, who cannot be indifferent towards how their child is taught, unlike over the past hundred years.
The digitisation of education is an irreversible trend. We knew this before the pandemic and will remain aware of it afterwards. After this test of an entire generation, people can no longer complain that something does not work. If it worked during this emergency, it can also work in a different situation. Parents will have to get involved in the process, though. Otherwise, they will be offering their children worse opportunities for development.
A positive aspect of this whole situation is that certain universities have been introducing systems allowing students to take certain subjects, programmes and courses online for years. It will still be a while before our education system looks like Udacity or Courser, but there is now a starting point that was put off for years.
.The virus has infected the invisible hand of the market. Until recently, liberal politicians and commentators repeated the dogma that the state should not interfere with the economy. Now they have changed their mind and are demanding money and government intervention wherever possible. In Poland, this change in tone is clearly visible among a few people representing employers’ organisations.
Belief in the market’s ability to manage alone, without governments’ involvement, started to decline around the world after 2008.
The state had to intervene and act when financial elites disappointed. In many countries, it had to rescue the financial sector and help those who lost their jobs. The idea that the absence of the state is the best way to cope with the crisis died.
Iceland went bankrupt, society broke down and the country’s political scene experienced catharsis.
Michał Sutowski from Krytyka Polityczna even wrote that, in Poland, “a thick line needs to be drawn under the Balcerowicz Plan”. He was referring to the words of Tadeusz Mazowiecki, who wanted to separate the new Poland from the communist-era one. Poland is exceptional in this sense; in the West, there are not so many economists representing just one school of thought. Heterodoxy is much more widespread. The perception of the state’s role is completely different, too; it is significantly bigger due to the welfare state built over decades. Now the second wave of strengthening the state’s role has come, after the one in 2008. We expect more from it and social-democratic or conservative ideas will be much better at describing social expectations than the liberalism of the past few decades.
Ideologically, this also means moving away from the idea of economic growth, towards sustainable development in which health and the natural environment play a significant role. Things might stay like this after the pandemic, although some observers say that liberalism will survive the pandemic and become even more resistant.
5. The role of the state
.The state is an active player regulating access to materials needed during the pandemic, but also restricting citizens’ mobility. Today, it is difficult to argue that a private healthcare system based on competition is better than a publicly-funded one, especially after the first person without health insurance died in the US (28 million Americans do not have insurance). The market is letting people down when it comes to access to crucial products; not just protective masks, but also disinfectant.
The state is therefore becoming invaluable when it comes coordinating production, consumption or even providing COVID-19 tests. Once again, it turns out that terror effectively builds trust in the state – at least until it is able to meet key needs at the bottom of the Maslow Pyramid.
Certain governments managed to intervene earlier, too, like in Taiwan and South Korea. They introduced far-reaching restrictions on movement and monitoring using mobile apps. After unsuccessfully trying to hide coronavirus cases, China imposed many restrictions and high penalties for breaking the quarantine, which enabled it to reduce the number of cases and fatalities.
Poland, Slovakia (which closed its borders and introduced strict measures before Poland, including a huge fine for breaking the quarantine), the Czech Republic and Hungary are limiting the spread of the virus much better than, for instance, Spain or France. As a rule, these countries have a weaker healthcare system that might not withstand so many cases at once. Poland and Slovakia introduced more drastic restrictions faster than other countries, which failed to understand the scale of the threat for a long time. In the interest of public health, bars, restaurants, cinemas, stadiums, shopping centres and gyms were closed, and restrictions were introduced at churches. Matches took place in Italy and France, and carnival went ahead in Germany and the US. At the end of March, Sweden and Britain had not taken broader steps to minimise the movement of people.
Moreover, the state has become an even more active economic player. In Germany, state spending as a percentage of GDP exceeded 50%. There were even more of these interventions, resulting from the size of the protective packages for the economy. Each country intervened, increasing its debt, issuing bonds and urging central banks to act. Germany even suspended the free market temporarily, with the Commission’s permission. Companies such as Lufthansa, Allianz, the RWE energy group and Deutsche Bank are worth less than their capital minus liabilities. Fearing takeovers by foreign investors, especially from China, the German government decided to introduce regulations that will prevent them.
The sector where the state’s role has declined is education, which has returned to the home. This has had a dual effect on children and young people: they have become more independent or more dependent on their parents. Amid general restrictions on movement and assembly, they have been granted one area of freedom.
.Everything suggests that, like during the previous SARS epidemic, the specific tastes of the top 1% of the Chinese population will be blamed for the emergence of the new virus. The virus came from the wet market in the city of Wuhan, China (or, according to a different version, from an employee at a nearby centre of virology). These markets sell live, wild animals for consumption, which, combined with poor hygiene conditions, fosters the spread of zoonotic diseases and epidemics. In Chinese cuisine, there is a long tradition of eating wild animals, but the development of animal breeding – of bats, for instance – marks the movement away from the collectivisation of agriculture, with its tragic consequences, towards allowing private initiative when it comes to supplying food. The Chinese Communist Party created a new segment of the economy in which the state monopoly did not apply, but created a major problem for itself, because it was used by business and party elites with sophisticated palates.
Following the SARS epidemic, wet markets were briefly closed in China, but the lobby was stronger than common sense. Former practices resumed. This was the Chinese government’s first mistake in the context of the pandemic.
If the political system in China were less authoritarian, the government would not have to introduce concessions in the sector. Instead, it could enforce sanitary norms.
The second mistake is how the Chinese authorities tried to cope with the crisis in Wuhan. The covering up of the first reports on outbreak of the epidemic resembles the infamous catastrophe in Chernobyl in 1986 (for the first few weeks after the fire at the nuclear reactor broke out, the Russian communists hid the news from the public). The Chinese authorities’ actions delayed other governments’ response. By underplaying the threat, the communists helped the virus spread globally.
A third mistake, or ill-considered action, can be added to this list. In March, the Chinese authorities expelled foreign correspondents as part of an information war, started changing the content of online articles in the English-language media in China and censoring scientific projects analysing COVID-19. The aim was to demonstrate the Chinese giant’s effectiveness compared to the decadent West, which was also picked up by Russian propaganda.
Retrospectively, the authorities in Beijing also started revising the number of deaths caused by the coronavirus, which did nothing to increase confidence in the official data on the scale of the epidemic.
Some observers claim that democratic states have fallen into chaos because it is difficult to conduct a political debate during a crisis. For example, in the US, the two chambers of Congress and the president failed to reach an agreement on the assistance package. As politicians, they naturally wanted to obtain something for their voters or to show themselves in a better light ahead of the 2020 presidential election. The Democrats failed to negotiate the elements that matter to their voters, such as salary caps for executives. America did not fall into chaos, though. President Donald Trump decided to temporarily suspend funding for the World Health Organisation (WHO), claiming that it has coped poorly with the pandemic (for example, by enabling the Chinese to conceal the true number of cases in December 2019 and early 2020). As part of the assistance package, Americans who lost their jobs received cheques with a letter signed by the president.
Another topic that has divided many societies is concerns holding elections during the pandemic. During a crisis, incumbent politicians can usually count on a few more points from voters. In the US, some of the Democratic Party’s primaries were suspended and postponed until later because it was technologically impossible to organise them remotely. As a result, the frontrunner, Joe Biden, was eventually endorsed by Bernie Sanders, so that he would start a debate at the political level, not just within a single party. In addition to topics linked to COVID-19, the candidates focused on the areas of the American economy that they want to change. The US election is set to take place this autumn, most probably by post. In South Korea, elections went ahead normally with sanitary protocols in place. In Switzerland and Bavaria, they were conducted by post; in Poland, the presidential election is supposed to be conducted by post, too. Some countries postponed elections, like Britain, where the government extended the local authorities’ mandate by a year.
In Hungary, Prime Minister Viktor Orbán opted to rule by decree so that the parliament would not have to meet. This was criticised by human rights organisations because no end-date for the emergency period has been provided. Orbán, who has been criticised for his authoritarian tendencies over the past decade, will have to relinquish his additional powers himself.
Many undemocratic leaders are using this extraordinary time to settle scores with the opposition.
In Iran, the authorities are brutally supressing anti-government protests. In Egypt, the imprisonment of human rights defender Ibrahim Ezz El-Din and student Patrick Zaki is being arbitrarily extended. In Saudi Arabia, the fate of Prince Salman Bin Abdulaziz al Saud, who was under home-arrest is unknown. In Algeria, Karim Tabbou was convicted during the appeal trial without his lawyers present. In Turkey, the conviction of the Gezi park activists, including Osman Kavali, was confirmed. In Thailand, anyone who criticises the government’s actions concerning Covid-19 or reveals scandals and corruption in the healthcare sector can be convicted. Some observers say that certain authoritarian governments could be shaken by the crisis, though; for example, in Belarus. Fearing the economic repercussions, the authorities have not limited people’s mobility, which is being criticised by society.
In most countries, the politics of pandenomics boils down to doing what one has always wanted to do. Leaders with authoritarian tendencies have sometimes shown their worst side. Democrats are not coping worse with the pandemic, despite the propaganda about Russia and China’s success. However, claims that non-democracies are handling the crisis better than democracies have become as popular as they are dangerous.
7. Fiscal policy
.The state needs to be bigger, as even the most hardened liberals can confirm. There are practically no economists saying that states should tighten their belts in the current situation. Even initial criticism of the loosening the EU’s fiscal rules has abated. The pandemic is mobilising states to act more strongly than the financial crisis a decade ago. Every month of economic hibernation reduces global GDP by 2 percentage points.
Huge stimulus packages will protect the global economy against total catastrophe, but will not allow its existing structure to be maintained.
In total, the G20 countries and Poland plan to spend over USD 4 trillion on fiscal stimulus – already during the first phase of the struggle against the coronavirus. The Polish fiscal package amounts to 6.2 per cent of GDP and is over 5 percentage points higher than during the financial crisis of 2009. This scale is unsurprising. The current situation seems more serious than the crisis a decade ago because the degree to which economic activity is being restricted is more characteristic of wartime conditions.
Comparing to the size of the current programmes to those in 2009 (as a percentage of GDP) shows that much more is being spent on saving the economy today. For instance, the USD 2 trillion stimulus package in the US is twice the size of the funds spent on protecting the economy during the financial crisis in 2007-2009. If the guarantee mechanisms being introduced were included, the value of the packages would be even higher (for example, for Poland, it would be 13.5% of GDP, rather than 6.2%, and 25% of GDP for Germany, rather than 4.9%).
The economic policies introduced by countries during the crisis have many common features, but their accents and details differ. Germany is using Kurzarbeitergeld, which aims to maintain employment at companies despite a fall in turnover. It involves state support for salaries when companies experience a shortage of orders. The changes in Kurzarbeitergeld introduced in March extend it to temporary workers, increase payments for social insurance for employees and increase the number of companies that can apply for compensation. Denmark, where the government is paying employees 75% of their salaries during the crisis, Britain, which is covering 80% of salaries, and most European countries are taking similar steps.
France is counting on maintaining as many companies as possible with government-guaranteed corporate loans issued by commercial banks. The maximum loan amount is the equivalent of 3 months’ turnover or a 2-year payroll.
In Norway, it is easy to lay off employees, but the state offers high unemployment benefits. They amount to over 50% of the employee’s salary and can be paid for 26 months over an 18-month period. Spain has introduced a ban on laying off workers during the crisis; employers only have to pay social insurance contributions and employees can apply for a benefit that amounts to 70% of their original salary.
Individual countries are doing everything they can to protect the economy from a long-term recession. The European Commission has also taken many steps, directing EUR 3 billion toward an Emergency Support Instrument, EUR 100 billion towards loans for countries requiring subsidies for programmes to maintain employment and an additional EUR 1 billion from the EU budget in the form of guarantees for the European Investment Fund. In agreement with the Commission, the European Investment Bank proposed EUR 40 billion for loan guarantees and additional liquidity for banks. Countries have been temporarily allowed to depart from the rules of the Stability and Growth Pact, which means that budget deficits can exceed 3% of GDP. The enforcement of fiscal rules was suspended, too. Deficits will soar in 2020, but the consolidation of public finances will have to wait until the economic situation starts to stabilise. After 2009, austerity failed to achieve its intended outcomes and held up development in many EU countries. The investment-based expansion in post-war Germany may offer a better perspective.
The example of Italy, which was especially hit by the debt crisis after 2012, but is also suffering due to the pandemic, is the most illustrative. Since 1995, the country has had a primary surplus in its budgets (in 24 of those 25 years), which means that practically a generation of Italians were brought up on a policy of belt-tightening and austerity, in which public spending was under control and state revenue exceeded spending. Italy had a deficit, but it resulted from debt-servicing costs, rather than from successive governments’ fiscal policy. This partly stems from Italy’s limited room for manoeuvre because it did not have its own currency. Devaluation had been fairly frequent in the country in the past.
8. Monetary policy
.Will central banks save us from the effects of the coronavirus? No, though of course they will try. Some have already cut interest rates. In the West, the Fed acted first, cutting the federal funds rate on 3 March 2020. It did so quite radically, reducing the rates by 50 basis points, rather than the usual quarter of a percentage point, at an unscheduled session. This sudden decision did not halt the fall in stock prices and actually increased market uncertainty. The American central bank cut interest rates again on 15 March, this time by a whole percentage point, to 0-0.25%.
Unfortunately, monetary policy is helpless when it comes to supply shocks. If an entrepreneur cannot obtain intermediate goods from Asia to use in his production process or if employees do not come in to work, the interest rate is meaningless, even though 65 countries around the world have taken this step and lowered it, including Poland.
Since ultra-low interest rates failed to revive economic growth following the big recession of 2009-2011, they are even less likely to help now, many economists point out. In response, central banks say they are doing everything they can to save the situation, including cutting interest rates, although there are other, better solutions, such as quantitative easing.
The European Central Bank was one of the first to decide not to cut interest rates, which are already negative, but dealt with what is most important: ensuring liquidity. It is doing so with more favourable conditions for TLTRO and incentives for SMEs when it comes to issuing loans. The ECB will also increase monthly purchases of financial assets to EUR 40 billion per month and focus some of the purchases on corporate bonds, in response to the deterioration of credit spreads. Lowering the cost of credit should be a factor prompting banks to increase or extend the duration of credit lines.
In the US, the Fed announced unlimited government bond buying. The National Bank of Poland resorted to non-standard monetary policy for the first time, as interest rates in the country were close to zero after two cuts and conventional monetary policy is incapable of increasing economic activity. Quantitative easing, which is often reduced to printing money, has become the new normal of the pandenomics era.
9. The European Union
.COVID-19 has given the crisis of multilateralism and international organisations that has been around for years a new dimension. International institutions such as the WHO have become ordinary statistics offices that are counting the number of coronavirus cases and fatalities, and even the EU has taken its place on the reserve bench after most decisions were made by member states’ governments. With EU leaders not even able to meet in person, it was difficult to speak of coordination at the international level.
The epidemiological crisis has revealed the highly personal way in which politics is conducted in the EU. A typical image of European politics is the stream of diplomats travelling to Brussels and shutting themselves in air-conditioned rooms to negotiate deals before flying back to their countries the same day. Every month, thousands of officials make the absurd journey between Brussels and Strasbourg – around 430 km – for the European Parliament’s plenary sessions. Lobbyists from around the world haunt MEPs and Commission officials, trying to develop solutions that benefit the business segment or social group that they represent. European politics is largely conducted over moules-frites, wine and coffee in the Belgian capital. The lack of personal contact means that many things cannot be arranged because it is not so easy to lobby without witnesses. The pandemic has halted the meeting and conference circuit, and disrupted social customs and the way of life in the Brussels bubble.
It has turned out that disputes and personal meetings are a key element in the creation of European law. The Bilderberg Meeting and the Illuminati would probably have faced similar problems if they had had to hold their traditionally secret gatherings over Skype Business or Zoom.
This is probably why it was so difficult for EU capitals to reach an agreement on an assistance package for member states in the context of the coronavirus. The EUR 540 billion package agreed on after four rounds of negotiations between Eurozone ministers of finance was sold to the media as the “biggest rescue plan in the history of integration”. Yet upon returning from Brussels the next day, Italian Minister of Finance Roberto Gualtieri was called a traitor in Rome. When the details of the agreement emerged, it turned out that none of Italy’s conditions had been met. There is no mention of coronabonds – joint debt that would allow the entire EU to finance the costs of rebuilding the damaged economy. Despite the Italians’ protests, the main instrument (EUR 240 billion) for supporting the most vulnerable countries’ finances is the European Stability Mechanism (ESM), an institution established eight years ago that provides loans for strict structural reforms. In addition, the funds for this aim were only going to be paid to support the health service. Finally, the fund for rebuilding the economy proposed by France, which was supposed to correspond to 3% of the Eurozone’s GDP (around EUR 360 billion) and be funded using coronabonds, was only mentioned in a very non-binding way. Germany and the Netherlands did not want to finance the debt of Italy, Spain and Greece. The decision to limit the scale of assistance for the countries with the highest number of coronavirus cases in the EU could threaten the community’s future.
Leader of the opposition League Matteo Salvini, which is set to take power if there are early elections, has already recommended that Italy leave the EU if no agreement is reached and the country is not offered real assistance.
10. The euro
.The pandenomics, in which national governments are making decisions about safety, but also the economy, the lockdown and strategies for emerging from it, means that the euro is once again very much in question.
Anti-EU sentiment is growing in southern Europe, but Berlin and The Hague have also started wondering how much the benefits of the single market and a dominant political role in the EU are worth – the heads of the central banks of Germany and the Netherlands, Jens Weidmann and Klaas Knor, protested against the QE launched by the ECB, but to no avail. Unlike financial decisions in the Council of the EU, those in the ECB are made by a majority of votes and the institution is headed by Emmanuel Macron’s candidate, Christine Lagarde, who is in favour of greater support from banks for poorer countries.
The ECB decided to launch a huge (EUR 750 billion) bond-buying programme for Eurozone countries’ bonds. This gives a total of EUR 1.1 trillion this year, which increases the Frankfurt-based bank’s liabilities to over EUR 5 trillion, an astronomical amount. This will probably lead to the ECB funding over 30% of Spain and Italy’s debt, above the unwritten limit for the Eurozone.
How big is the bank’s involvement in Italy and Spain, where it is directing its funds first? Has it exceeded the symbolic threshold of 50%? And is this still acceptable to Germany? This is unclear.
However, it is certain that Italy, which has been muttering about leaving the Eurozone, and some politicians who have been wanting to circumvent the common currency in various ways have a chance to prove themselves. Today, a significant percentage of Italians are against the EU, Germany and the euro. The lack of solidarity from EU capitals and the mistakes at the root of the creation of the common currency area still linger. According to a Termometro Politico poll conducted on 8-9 April, 39.9% of Italians want to leave the EU and the Eurozone, 7.5% to leave the EU and remain in the Eurozone, 7.7% to stay in the EU and leave the Eurozone, and 40.9% to remain in both.
The experiment known as the euro could end or lead to a social and political revolt in Italy. This could be the future of the currency in the times of pandenomics.
11. International trade
.This year started pretty well in terms of the outlook for international trade. Under pressure from his own electorate, Trump reached a trade agreement with the Chinese government. The trade war between the two powers ended. At the same time, disputes over the use of 5G by US allies, as well as the security offered by Chinese software, continued. According to some analysts, a war between the US and China cannot be ruled out and could break out in the next decade.
According to Britain’s intelligence community, the country needs to rethink its relations with China after the coronavirus crisis and consider whether stricter control in high-tech and other strategic industries is needed.
The tensions between the US and the rest of the world, and especially China, which the American administration has blamed for the spread of the coronavirus, did not appear suddenly. For years, America has been withdrawing from its role as leader of the free world due to the weakening US economy and the growing role of China, but also increasing domestic problems, which means that American politicians look inwards more often than outwards.
Whereas globalisation connected the world for most of the previous century, its political impetus has slowed down considerably in recent years (Brexit, the election of Trump). This reality has already started complicating the operations of international companies that use just-in-time supply chains around the world. Maximising financial benefits at the expense of reduced security of supply and encouraging foreign investors to enter markets could already be over.
In trade, there could be less and less economics, and more and more political science. As the coronavirus reduces the size of the labour market, creating new jobs for voters hit by the pandemic will be in many governments’ interest. This could reduce profits, but be in line with national interest (not China’s, though).
The drop in many listed companies’ valuations, but also those pushed to the brink of bankruptcy, means that EU countries’ governments have started to worry about whether their “crown jewels” will be bought by the Chinese. Margarethe Vestager, the Commission’s vice-president, who is responsible for competition, has started urging member states to buy shares in companies operating on their territory. She has also signalled that the Commission will need to be more flexible in its approach to competition. The Commission has no problem with the state acting like a market participant when this is needed to block the takeover of a company by foreign capital. The German government has already introduced similar measures and Poland is updating the list of strategic companies that cannot be taken over by foreign investors (especially from China).
In the face of the crisis, the most important countries in the EU and the commissioner for competition are speaking with one voice with the US president, which shows a certain unification in the West. Larry Kudlow, the American president’s economic adviser, went even further, saying that the US administration will help companies producing in China move back to the US. The Japanese could realistically follow in the Americans’ footsteps, too.
The world has not united in the face of a single enemy; instead, the coronavirus has confirmed all of global leaders’, but also societies’, biggest fears. It has further strengthened the conviction that capital has a nationality, that international politics is a zero-sum game and reduced confidence in China.
Geopolitical tensions were already high before the pandemic. China, which has been growing stronger by expanding its presence in international organisations (including the WTO) could now lose considerable influence, as well as many investments.
After the pandemic ends, countries may have to build relations anew or decide where to locate factories or manufacturing. Asia could cease to be such an attractive place for investments, though it will probably fight to retain its title as “the world’s factory”. Poland is one of the last places in Europe where garments are still sewn, which has become relevant when it comes to producing protective masks. There could be more of these specialisations, resulting from production potential, in Latin America, Turkey and Central Europe as a whole.
.In Poland the start of the 1990s featured the explosion of “grassroots initiatives”, which is also remembered as a “capitalism of camp-beds and false teeth”. Today, we can perhaps speak of an explosion of field hospitals, as all countries have prepared for the worst in their healthcare system.
In the face of the COVID pandemic, Congress approved multi-billion subsidies for hospitals and healthcare in the US. However, with its actions, it could perpetuate the current state of the American healthcare system, which is considered one of the least effective in the world, or accelerate its reform. The subject of healthcare reform appears in many countries, but it is difficult to carry out and the political benefits are not felt until later. As countries grapple with the pandemic, perhaps something will finally change. This is a symptom of wishful thinking among many analysts and politicians, though.
Nevertheless, COVID-19 has brought at least two main changes for healthcare around the world. Firstly, telemedicine is everywhere now. For years, doctors resisted it because it was either too difficult to learn or, worse, because they earnt more money when patients came to see them. Almost overnight, the pandemic forced doctors to close their practices and shift almost exclusively to providing medical advice online or over the phone. For pregnant women, many obstetricians are currently carrying out most prenatal visits virtually. Dermatologists are diagnosing less dangerous skin diseases with the help of phone cameras.
This is crucial, because telemedicine is profitable in cases that do not require physical contact. It also makes it easier for doctors to provide care after hours, reducing expensive emergency calls and urgent visits to the clinic.
Secondly, hospitals have tightened the criteria for hospitalisation, which means that more beds are available for patients with COVID-19. Only ill patients are admitted to hospital. Chemotherapy is conducted at people’s homes more often. In general, patients who receive medical treatment at home recover faster, with fewer tests, fewer readmissions and better quality of life. Care at home usually costs less than that at hospitals, too. COVID-19 has shown that more patients can receive good medical treatment without hospitalisation.
COVID-19 has also reduced the use of ineffective or low-value medicines, laboratory tests, and diagnostic and surgical procedures. This is because masks, aprons, gloves and hospital beds are being rationed; to a large extent, hospitals and outpatient surgical centres have cancelled scheduled procedures. Many unnecessary tests that were inflating medical bills in the US are not being carried out to save equipment and money. Admittedly, many healthcare systems rationalise costs in this way, but this practice has become universal now.
In many poorer countries, the pandemic has highlighted the underfunding of healthcare systems. While the US might be able to spend too much ineffectively, countries in Central Europe, which reacted to quickly and very strongly to the epidemic, were aware of their healthcare systems’ flaws and that they might not cope.
Subsidising healthcare systems and ensuring generational replacement among doctors and nurses in Central Europe could be a priority for the years of rebuilding the economy – unless, of course, business as usual or austerity after a period of fiscal expansion triumphs.
It is not worth saving on health, though, because nobody knows whether the next pandemic is just around the corner.
In the 21st Century, epidemics are not an unexpected phenomenon. We can safely assume that another one will appear in a few years’ time and that our healthcare system (and our system of international institutions) should be ready to respond. This time, criticism that the WHO did not do enough may be justified because it failed to inform countries early enough and did not take reports from places such as Taiwan as seriously as it should have.
We have an opportunity to use the progress in healthcare made during the pandemic. Thinking back to 2020, we might remember that – despite the losses – COVID-19 saved the health service.
Perhaps, paradoxically, the pandenomics will save our health?