Although we are only just beginning to face the magnitude of the shock caused by the Covid-19 pandemic, we have to assimilate a painful truth now. We are in the early stages of what is to become a series of chain crises, echoing throughout the world. And we will not be able to return to anything resembling normality unless the great powers find a way to cooperate and manage these problems together.
The first phase has been the health crisis in the largest economies in the world. The one that follows is that of economic paralysis, the magnitude of which we are just beginning to conceive. In the past two weeks, 10 million jobs have been lost in the United States, exceeding the 8.8 million that were lost in total during the 106 weeks of the 2008-2010 recession. And this is only the beginning.
The next thing is definitely the country default risk. Italy entered this crisis with the highest level of public debt of the eurozone countries, and the third highest in the world. The country’s debt will skyrocket as you spend money to combat the repercussions of Covid-19. Italy is the third largest economy in Europe, but it is only one of the many European countries at risk of a fiscal collapse. And this comes at a time when Europe’s most dynamic economies, which often provide the funds and guarantees for bailouts and support mechanisms, are also in trouble. Germany, which has not had a serious recession in the past 40 quarters, anticipates that its economy will contract 5% this year.
Then will come the “explosion” from developing countries. Until now, the numbers of infected people have been low in countries like the India, Brazil, Nigeria or Indonesia. This is probably because they are countries less interconnected by trade and tourism than the developed world. Furthermore, these countries have tested relatively few people, which it keeps its numbers artificially low. However, unless we are lucky and it turns out that the heat does hinder the virus, these countries will be hit, a lot. All of the aforementioned are struggling with liquidity, and the loss of tax revenue, combined with the need for major new subsidies, can easily precipitate them into their own versions of the Great Depression.
And so Oil countries will come. Even if the fight between Saudi Arabia and Russia is resolved, at this point the demand for oil has collapsed and will not recover soon. A source in the industry has told me that his company expects oil to drop to $ 10 a barrel for sure, and it will stay there. Consider what this means for countries like Libya, Nigeria, Iran, Iraq or Venezuela, where oil revenues represent the vast majority of government revenues (most often from its entire economy), but which only profit from oil sales when prices are above $ 60 a barrel. There will be political unrest, refugees, perhaps even revolutions, to a level unprecedented in recent decades, not since the last phase of oil at $ 10, when the Soviet Union collapsed.
The world has entered this pandemic with two challenges. It is flooded with debt, government and private. With a total gross domestic product of 90 trillion dollars, public and private debt add up to 260 trillion dollars. The world’s two leading economies, the United States and China, have debt-to-GDP ratios of 210 and 310 percent respectively. This crisis is taking place at a time when global cooperation has collapsed and the traditional leader and organizer of these efforts, the United States, has completely abandoned that role.
Last month, the G7 meeting was unable 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 a schoolyard. The cornerstone of any global effort would have to include close cooperation between the United States and China. Instead, the relationship is in free fall, with each side rejecting blame and blaming the other. The G20 follow-up meeting was also a fiasco. Even the European Union was slow to recognize the seriousness and scale of the pandemic. Reckless remarks by the President of the European Central Bank caused the worst stock market crash in Italy in the country’s history.
What would be achieved with greater global cooperation? Since much of the containment strategy involves travel between countries, it would be much more effective if travel bans and warnings were coordinated. During the 2008-2009 recession, central banks and governments worked with each other, helping to contain and cushion financial contagion. Without aid and coordinated efforts, countries like Iraq and Nigeria will surely end up exploding, which will likely mean the multiplication of refugees, disease and terrorism beyond their borders. If richer countries pool funds and share information, the arrival of treatments and vaccines will accelerate. And when the time comes to reopen economies, coordinated action, for example in trade and travel, we will have the best results from our investment.
The problem we face is broad and global, but unfortunately, the responses are getting narrower and parish.
