It is clear that there is never a good time for a pandemic, however, the COVID-19 crisis has come at a particularly bad time for the world economy. And the world has long drifted into a perfect storm of financial, political, socio-economic, and environmental risks, which are now becoming even more acute.
Certainly, after the 2007–09 financial crisis, the prevailing imbalances, and risks in the world economy were exacerbated by policy mistakes. Therefore, instead of addressing the structural problems revealed by the financial collapse and the resulting recession, governments mostly kicked the can along the way, creating significant downside risks that made another crisis inevitable. And now that it has arrived, the risks are getting sharper. Thus, it is important to say that unfortunately, even if the Great Recession leads to a mediocre U-shaped recovery this year, an L-shaped “Great Depression” will follow later this decade, due to ten sinister and risky trends.
Risks
The political response to the COVID-19 crisis implies a massive increase in fiscal deficits, of the order of 10% of GDP or more, at a time when public debt levels in many countries were already high, if not unsustainable. Likewise, the COVID-19 crisis shows that much more public spending must be allocated to health systems and that universal health care and other relevant public goods are necessities, not luxuries. However, because most developed countries have aging societies, financing these disbursements in the future will make the implicit debts of today’s unfunded health and social security systems even greater.
Furthermore, it is clear that as central banks try to combat deflation and avoid the risk of rising interest rates, monetary policies will become even less conventional and far-reaching. And is that in the short term, governments must run monetized fiscal deficits to avoid depression and deflation.
Likewise, the pandemic is accelerating the tendencies towards balkanization and fragmentation that were already underway. The United States and China will undock faster, and most countries will respond by adopting even more protectionist policies to protect national companies and workers from global shocks. The post-pandemic world will be marked by stricter restrictions on the movement of goods, services, capital, labor, technology, data, and information. Indeed, it needs to be noted that this is already happening in the pharmaceutical, medical equipment, and food sectors, where governments are imposing export restrictions and other protectionist measures in response to the crisis.
Source: Nouriel Roubini | Project Syndicate
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