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The world needs to better prepare for future catastrophes | View

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The deal struck on global tax naturally, stole the limelight at the G7 Finance Ministers meeting. But lingering bottlenecks in international supply chains and the vague policy coordination in the pandemic’s aftermath shed light on another policy target: resilience-building in both public and private life.

Disruptions of global production processes have stress-tested the ability of economies and policies to react. But international coordination has been the exception, not the norm.

Even within the EU, coordinating national and regional policies has been far from efficient. Economic and health policies were issued abruptly due to the severity of the crisis, even though policymakers had been warned of a potential pandemic for many years. In Europe, as in the US, there had been little to no planning for events of such severity. Muddling through was the order of the day.

Globalised systems of production were just as unprepared as policymakers. In the past two decades, global value chains have expanded in both length and complexity, driven by production cost-efficiency and the intensification of global trade linkages. The longer international supply chains are, the more likely it is that a random local or regional event causes large-scale production disruptions.

This is a game-changer for regions, such as Central and Eastern Europe (CEE), which have to date reaped massive benefits from their integration into European and world markets. The COVID-19 pandemic revealed that what once made the region prosperous can be a source of great distress and underscored the exposure of long and complex supply chains to shocks originating in faraway places.

There are three main driving forces.

First, due to digitalisation and technology take-up, producers and consumers are linked to each other in a manner that was inconceivable 20 years ago. Whilst this has led to significant improvements in the quality of our interactions, the associated risks have not been well managed. The flip side of these great technological advances is that the potential for disruption has increased exponentially.

Second, geopolitical tensions are on the rise. Post-1990s, there was hope of a move towards global systemic convergence, underpinned not least by China joining the World Trade Organization. These hopes have been confounded, and we are witnessing a period of significant systemic tension in an increasingly multipolar world. Trade relations have at times been weaponised, to the detriment of predictability of international politics and business.

Third, decades of exploitation of the global commons has led to the possible irreversibility of environmental degradation. Making our systems environmentally more resilient means disrupting established processes, at least in the short run. As inevitable as that is, it will require global agreements and instruments of solidarity for those who are hardest hit – within and between countries.

This means that financing resilience, and the ecological transition more specifically, needs to move to the mainstream of public budgeting.

Resilience, the ability of an economy to cope after a shock, needs to considered when creating public budgets, something which would have future policy implications. An internationally fair and efficient system of taxation needs to ensure that tax evasion and aggressive tax planning should become impossible – the recent breakthrough of a global corporate tax rate is therefore a step in the right direction.

Public investment that works for making economies and societies more resilient needs to be protected in public budgets and within EU rules.

Businesses – especially, small ones – have been disproportionately affected by the pandemic. Large companies often enjoy direct policy support but such help simply does not trickle down to micro firms. Nonetheless, small and medium-sized businesses (SMEs) are significant sources of growth (55% of EU gross domestic product) and employment (65%) in Europe.

Resilience-policies, including those that enable innovation, tailored for SMEs are essential. The EU should establish an EU SME Resilience and Innovation Hub that researches and disseminates best practice in their management, technology and financing.

The overall volume of financing needed to meet these targets surpasses the financing capacities of governments by a large margin. So capital markets will need to provide a sizeable part of such finance, which includes financing resilience-enhancing innovations of SMEs. Within the EU, the project of a Capital Market Union is paid lip service by politicians but has failed to make the necessary progress to date. This would require a political push at the highest level to overcome bottlenecks connected to protecting the status quo, at the expense of our collective ability to finance investments in the future.

Thomas Wieser is the EU Representative to the G7 Panel on Economic Resilience, Soňa Muzikárova is the Chief Economist at GLOBSEC, Vazil Hudák is the EU Envoy for Small and Medium Sized Enterprises (SMEs).