The coronavirus epidemic is an economic calamity of historical proportions. The stock-market collapse Mondayrivaled the worst days of the 2008 financial crisis. Oil prices dropped faster than at any time since the Persian Gulf War in 1991. The yield on U.S. bonds approached zero percent, the lowest ever.
It needn't have happened, not at this scale. History shows that a concerted show of force from the world's leading governments could have stopped the panic. But no such demonstration came, suggesting the world's inward turn over the past half-decade is making the coronavirus crisis worse. As COVID-19 spread, politicians mostly hunkered down to protect their own turf, and evidence of racism seeped into the narrative. Traders lost hope and punched their sell buttons.
"There is a palpable crisis of confidence around the world, in part because of a loss of confidence in national and global leadership,” Kevin Rudd, the former Australian prime minister, warned Friday. "This is reflected in public panic and financial markets' heightened volatility.”
Politically, Rudd is from another era, even though he has been out of politics for less than a decade. Rudd adhered to the same liberal, globalist credo as Barack Obama. And as happened with Obama, his departure was followed by a political wave that swamped much of his legacy.
Rudd, Obama and other pre-Trump, pre-Brexit globalists were clearly out of touch with all that was happening close to the ground in their countries. But at least they figured out how to fight a global recession: Leaders from a couple of dozen countries met, committed to do what was necessary and backed those promises with action. It inspired confidence and calmed markets. Leaders were able to pull it off because, more often than not, they devoted effort to getting along.
In contrast, the current powers spend more time jousting than trying to get along. For the past four years, the leader of the free world has harassed allies such as Canada, Mexico, Japan and the European Union with import tariffs and threats of tariffs. President Donald Trump also has mused about quitting NATO, the military alliance that includes much of Europe and Canada, and he did quit the Paris Agreement, an effort that most of the world ranks as a priority.
Those are only Trump's assaults on international cooperation. The U.K. and Europe tangled for years over Brexit, and now they are fighting over the terms of a trade agreement. Western countries have done more lately to wreck the world economy than to fix it, while other powers, such as Russia and China, have only intensified their efforts to seize territory and stem the West'shegemony rather than work in tandem.
When the virus that causes COVID-19 arrived in Italy, it should have been clear to the world's leaders that they were facing an international threat, just as in 2008, when the failure of banks in New York and London ended up damaging livelihoods almost everywhere else. A lesson of that episode is that no single country is big enough to control the modern economy. A disjointed response in the early stages created the conditions for the Great Recession. It was only after nations started working together that the carnage stopped.
The seeds for more active cooperation were planted a couple of decades ago when Paul Martin, the Canadian finance minister, and Lawrence Summers, the U.S. treasury secretary, created the Group of Twenty (G-20), an assembly of their peers from legacy powers such as Germany, emerging powers such as China and middleweights such as Australia because they realized that the world had become too complex for the West to handle on its own.
If most people know anything about the G-20, it's because they've heard stories about how it stopped the Great Recession from becoming something worse. It held two summits at which participants pledged some $5 trillion in economic stimulus. It was a high point for globalists, if a low point for globalization itself. Outward-looking leaders, backed by able technocrats at their central banks and finance ministries, cooperated to find a way out of the crisis. Eleven years clear of the crisis, the U.S. jobless rate is the lowest in 50 years.
The spread of COVID-19 will almost certainly reverse the U.S.'s extended run of hiring as hundreds of billions of dollars of economic activity is erased. The best-case scenario, in which the virus is mostly contained in China, is that the world economy resumes normal functioning once stricken places are back online. Even so, the Organization for Economic Cooperation and Development (OECD) on March 2 cut its forecast for global economic growth to 2.4 percent, the weakest since the financial crisis. In a worst-case scenario, with epidemics in multiple countries, global growth could slow to 1.5 percent.
The OECD's chief economist pleaded for the G-20 to work together, but some of its members are actively making things worse. This year's chair of the G-20, Saudi Arabia, decided to start a price war in global oil markets, triggering the major collapse in prices as both it and Russia tried to use the drop in demand for oil thanks to COVID-19 to squeeze rival energy producers. Russia is also a G-20 member. Among the innocent victims in the Saudi-Russian clash were Canada, Mexico and Brazil, three significant oil producers that also are G20 members and were hurt, as well.
Even if world powers did show up for a summit, they have lost so much credibility that their ability to contain the crisis is limited. The smaller G-7 said last week that its member countries would use all "appropriate policy tools” to preserve economic growth, but it didn't actually deploy any — hence the stock market plunge on Monday. Even an emergency interest rate cut by the Federal Reserve wasn't enough to restore confidence that day.
"Central banks are no longer seen as able to repress financial volatility,” Mohamed El-Erian, chief economic adviser at Allianz, wrote in The Financial Times. El-Erian said governments must lead the response to the crisis because lower interest rates can't do anything about quarantines.
"Global confidence will recover only when both the public and markets see that governments collectively have stepped into the breach” is how Rudd put it.
The Great Recession exposed the weaknesses of globalization. A mysterious virus that originated in China and is spreading around the world is proving that nationalism is no better, and probably worse.
- Kevin Carmichael is the national business columnist at the Financial Post and a senior fellow at the Centre for International Governance Innovation. He previously covered the Treasury Department for Bloomberg News and was the U.S. business correspondent for The Globe and Mail.
This piece was first published by NBC Think.
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