Coronavirus crisis: major economic and financial consequences
We rediscover that health is a global public good, and that public health and welfare systems are crucial alternatives to the market.
The coronavirus pandemic is rapidly changing health conditions, daily life, social relationships and economic prospects around the world. In the first 55 days of the pandemic, the World Health Organization reported 155,000 cases and 6,500 deaths worldwide. In China, where the virus started, the infection seems to have stopped after reaching 81,000 cases; in Italy – the second most affected country with 25,000 cases – the pandemic has not slowed down yet. In many of the other 146 countries infected, the virus is spreading at a sustained pace and, as we write, several countries – including the United States – are introducing drastic measures to address the spreading of the virus. The consequences of this pandemic will be wide-ranging, affecting our views of health and the public good and the way the world economy works. In these notes we reflect on the issues raised by the pandemic, the lessons we can learn, and the possible changes in the relationships between health, economics and politics.
Health is a global public good
The necessary starting point is a conception of health as a fundamental right. The Universal Declaration of Human Rights of the United Nations states: “Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services”. From an economic and public policy perspective, health is a global public good; it cannot be produced as a commodity and sold on the market to individual consumers, and is highly vulnerable to lack of health – or, in fact, to the emergence of epidemics – in any point of the planet.
The importance of global public goods was recognised in the late nineties in the context of the debate on globalization:
“The United Nation Development Programme defines a global public good as ‘a public good with benefits that are strongly universal in terms of countries (covering more than one group of countries), people (accruing to several, preferably all, population groups) and generations (extending to both current and future generations, or at least meeting the needs of current generations without foreclosing development options for future generations)”
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The specificity of health as a global public good has been at the centre of several studies including its link to climate change and is now acknowledged even in World Bank policies for the prevention of pandemics.
But the trajectory of the global economy has disregarded the need for global public goods. Neoliberal globalisation has prevailed, creating rules and institutions to protect the free movement of capitals and commodities only. New inter-governmental organizations were born – such as the World Trade Organization - and new global private powers ruled – the financial centres of Wall Street and the City, rating agencies, multinational corporations.
But the trajectory of the global economy has disregarded the need for global public goods.
In those years, progressive European governments, trade unions, the International Labour Organization and social movements had proposed combining economic globalization with new global protections for labour and social rights and the environment – as shown by the documents of the movements against the WTO summit in Seattle in 1999 and the Millennium Forum of civil society at the United Nations in 2000 collected in our book Globalisation from below. They were ignored. No rules and resources on a global scale were introduced for welfare and health policies, for labour rights and environmental standards. These aspects were considered simply a ‘cost’ for the economy, left to fragmented national policies, put under pressure by privatizations and cuts in public resources.
The coronavirus pandemic has made visible the economic and social costs caused by the lack of adequate health and welfare systems in all countries and by the absence of global rules on the protection of health – from the markets of live animals in China to the ability to quickly identify and address an epidemic. The same holds for many environmental disasters – present and future ones – caused by climate change.
In order to address these global issues, we need to radically rewrite the rules of globalization. Health, welfare, labour rights and the environment must be protected by international standards which should be binding for the international movement of capitals and goods. The policy proposals put forward by the World Health Organization, the International Labour Organization and the Climate Change conferences must acquire a new political priority and obtain the much needed resources. The United Nations’ Sustainable Development Goals, endorsed by all governments, offer an additional framework in which to place these priorities
The welfare state is an effective alternative to the market
In responding to the coronavirus pandemic a fundamental role is played by public health systems. As Joseph Stiglitz argued, “when we face a crisis like an epidemic or a hurricane, we turn to government, because we know that such events demand collective action”. Public health systems are based on a vision of health as a fundamental right that must be guaranteed by the government through the provision of universal public services designed to meet individual and social needs, outside the logic of the market. In Europe this model has inspired the construction of the welfare state since the radical reforms introduced after World War II by the Labour Party in Britain. The welfare state – with its national varieties – remains at the core of the European ‘social model’; health, education, universities, pensions, social assistance and other key activities are provided and financed mainly by public action.
The welfare state – with its national varieties – remains at the core of the European ‘social model’.
Three decades of neoliberal policies have seriously reduced the welfare state: privatizations and cuts in public budgets have forced public agencies to downsize their activities, sometimes losing universality, effectiveness and quality of services. Private companies have entered these activities, starting from the most profitable fields – pensions, healthcare and universities. Reduced funding, lack of turnover of personnel, pressure to make ‘clients’ pay for services have pushed welfare services to become more similar to market goods. The market system has been presented as the only way to effectively supply goods and services.
The pandemic has dramatically shown the price of such a neoliberal turn. Market globalization creates health threats and is completely unable to respond to emergencies. Private health care is largely irrelevant in facing the pandemic. The welfare state is not a ‘cost’ for the private economic system. It is a parallel system that produces public goods and services and ensures the reproduction of society based on rights and needs of citizens, rather than on the ability to spend of customers. The welfare state produces wellbeing and social quality – dimensions that the Gross Domestic Product (GDP), based on the market value of goods, cannot measure. The same arguments apply to environmental quality and the need for public intervention in this area (a measure of sustainable welfare in Italy is developed here).
The obvious consequence of this analysis is that we should massively refinance – through a more progressive taxation of income and wealth and through deficit spending – the whole range of public activities – health, education, universities, research, pensions, social assistance, the environment. The welfare state could become the engine of a new model of development, with high social quality and environmental sustainability. However, public policy should not be limited to the provision of welfare services. It must guide the development trajectories of the economy as a whole, ensuring consistency between business behaviour and the social, health, and environmental goals mentioned above.
In this regard, the debates on the return of industrial policy and on the ‘European Green Deal’ have opened up a new space for public action at the national and European levels. There is growing consensus on expanding the role of the state and on the need for public action in the economy and society. An important example is provided by Mariana Mazzucato’s proposals on the ‘entrepreneurial state’ and on the nationalization of the pharmaceutical industry.
It would be a mistake to believe that, once the pandemic has passed, the economy could go back to ‘normal’. We need to rethink production and consumption in the light of health and environmental needs. There are other health crises that receive much less attention: occupational health and safety has been disregarded, and work-related accidents and deaths continue to be a dramatic issue. Pollution-related illnesses and deaths related to low environmental quality are a rising challenge in all countries. The ‘deaths of despair’ are a major social problem in the US and other countries, with a booming number of deaths, mainly of poor white men, related to suicide, alcohol, the use of opioids and drugs.
It would be a mistake to believe that, once the pandemic has passed, the economy could go back to ‘normal’.
To confront such challenges, we have to move towards an economic system of greater quality, one which is able to cause less damage to the health of workers and citizens. Indeed, health and welfare could become a key engine of a novel development. In the current debate on the return of industrial policies, in a report on “What is to be produced?” we have proposed to identify three priority areas where public and private research and investment could be concentrated, in order to develop a ‘good’ economy - environment and sustainability; knowledge and information and communication technologies; and health and welfare activities. For the latter, we argue that:
“Europe is an aging continent with the best health systems in the world, rooted in their nature as a public service outside the market. Advances in care systems, instrumentation, biotechnologies, genetics and drug research have to be supported and regulated, considering their ethical and social consequences (as in the cases of GMOs, cloning, access to drugs in developing countries, etc.). Social innovation may spread in welfare services with a greater role of citizens, users and non-profit organisations, renewed public provision and new forms of self-organisation of communities.”
Such a policy can be built in Europe using existing institutions, policy tools and resources, pushing economic activities towards the protection of health and welfare and towards a ‘green industrial policy’.
The welfare state and public health reduce inequalities
Inequality is a major concern in this context. Since the 1980s, as a result of neoliberal policies, advanced countries have experienced sharp increases in income and wealth disparities. Because of its nature as a supplier of goods and services based on individual and social needs, the welfare state has been a key factor in reducing inequalities after the Second World War. As argues in our book “Explaining inequalities”, the reduction of the policy space, the privatization of public services and the extension of the market in areas previously protected by public action have introduced new mechanisms that generated economic and social disparities.
The connections between economic inequalities and health disparities have been well documented; several studies have shown that more unequal societies are associated with worse health and well-being conditions and that large gaps between the rich and the poor are associated with a worsening of health conditions and life expectancy of the poorest people. In Europe a report from the European Commission recalled that:
‘In all countries with available data, significant differences in health exist between socioeconomic groups, in the sense that people with lower levels of education, occupation and/or income tend to have systematically higher morbidity and mortality rates’.
And, considering the economic effects of disparities in health conditions, the EU report calculated that:
“The number of deaths that can be attributed to health inequalities in the European Union (EU-25) as a whole is estimated to be 707,000 per year and the number of life years lost due to these death is about 11.4 million. Health inequalities also affect the average life expectancy at birth of for men and women, decreasing it by 1.84 years (...). The total amount of costs due to health inequalities - obtained from the combination of data relating to mortality and morbidity - is close to 980 billion euros, 9.38% of EU-25 GDP in 2004. In other words, the loss of health due to socio-economic inequalities represents 15% of the costs of social security systems and 20% of the costs of health care systems in the European Union as a whole”.
The relationship between inequalities and health has been analysed in several countries by considering different social and professional conditions (a study on Italy is here), showing that mortality rates increase in proportion to economic and social hardship, lower incomes, education and social class. Thus, reducing economic inequalities would make it possible to reduce health disparities; at the same time greater universal and egalitarian health protection would significantly reduce the costs of public health and welfare.
In this situation income levels matter relatively little and there is no way to ‘buy’ individual protection on the market.
It is a paradox that today the spreading of the pandemic creates a condition of (almost) equality in the probability of contagion: in this situation income levels matter relatively little and there is no way to ‘buy’ individual protection on the market. Equality in behaviours and health treatments becomes essential to fight the pandemic. But such equality can only be the result of universal public health, a fundamental outcome of the welfare state. As such, equality should be recognized as a key priority for the economic, social and health care policies of the post-coronavirus age.
Europe needs changing, rediscovering its welfare state
In post-war decades the European model of development has been built on the basis of a ‘mixed economy’ with a strong state intervention and a central role of the welfare state. Since the 1990s, Europe’s economic and monetary integration has taken a different path, that of neoliberalism and the expansion of finance. Since the 1992 Maastricht Treaty, European rules have drastically weakened – through privatizations and constraints on public spending – these two pillars of the European model. The 2008 crash has made apparent the inadequacy of European institutions and policies; the crisis has turned into a decade of recession and stagnation for Southern European countries; a major legitimation crisis has infested the European Union, contributing to the eventual exit of the UK from the Union.
This is a scenario that could happen again, as Europe lacks the ability to quickly intervene addressing the economic consequences of the coronavirus pandemic. In these days, lacking European coordination, individual national governments are taking actions in fragmentary ways, with many countries unilaterally closing their borders. Europe is nowhere to be seen.
Europe is nowhere to be seen.
Facing the coronavirus pandemic, a strong European financial commitment and a change of its institutional set-up has been proposed by the former president of the European Commission Romano Prodi and Alberto Quadrio Curzio: “the European Union has the tools to implement a project for the next decade which is able to mobilize, without any risks and with very limited costs, an increase in investment of at least 500 billion euros per year”. The authors renewed the proposal to introduce EuroUnionBonds, based on the experience of the European Stability Mechanism (which can already issue European securities) and on the activities of the European Investment Bank. According to Quadrio Curzio, “a system with a central bank and a single currency must also have an adequate federal or confederal budget, between 10 and 20% of GDP, which can be financed with capital market issues”. Quadrio Curzio also proposed the issue of a ‘Euro Rescue Bond’(ERB) to face the spreading of coronavirus: “with appropriate guarantees, the ECB itself could purchase the ERBs as it has purchased government bonds of individual countries”.
Such measures – a significant expansion of the European budget, the issuance of Eurobonds that the ECB can buy directly, a rethinking of the role of the ESM and the EIB to finance European public investment – are essential for turning Europe into a political institution capable of facing the pandemic and its economic consequences, avoiding the current paralysis and the fragmentation of national responses.
On March 13, 2020 the President of the European Commission belatedly announced the utmost “flexibility” with regard to the rules of the EU Stability Pact on the public expenditures of countries facing the pandemic. This is an extremely modest move. Calls are mounting in Europe for much more decisive action.
Calls are mounting in Europe for much more decisive action.
Beyond the immediate emergency, a radical change in European policies is needed. European fiscal policy should be based on a large common budget and greater autonomy for national governments, starting with a ‘golden rule’ excluding public investment and all emergency-related expenditure from spending limits. European policies on expenditure, taxation and deficits must allow the development of the welfare state that is typical of Europe’s model, favouring the convergence of member countries to high levels of performance. In parallel, European policy must promote and finance efforts of all countries for restructuring their economy to prevent and adapt to climate change. Along this road, Europe could become an international model, setting international standards on health, welfare and environmental issues, assuming a leadership in international organizations, identifying the most effective ways to face today’s pandemic and tomorrow’s climate emergency.
Unfortunately, there are no signals of change from the European Council, the European Commission and national governments; there is no political vision and capacity for action adequate to the severity of the current emergency. The coronavirus crisis may indeed become a crisis of European integration.
The economic crisis has arrived
The coronavirus pandemic is bringing us a major economic crisis. According to the last OECD Economic Outlook, annual global GDP growth is projected to fall to 2.4% in 2020, from an already weak 2.9% in 2019, with a possible contraction of GDP in the first quarter of 2020; GDP growth in China could be below 5% this year, with a marked downward correction. The spread of the pandemic in Europe and the US will make the fall in GDP much larger, with stagnation or recession in all of Europe, and a significant fall – maybe in the range of 5% – for the most fragile economies of Southern Europe.
The drivers of the crisis are the stoppages in production and consumption in the months of most acute diffusion of the pandemic (the first quarter in China and Italy, the months from March onwards in the rest of Europe and in the US). Whole sectors – such as air travel, transportation, tourism and restaurants – have completely stopped. As European economies are closely integrated in global value chains, they will probably suffer from a ‘supply-chain contagion’. Additional negative economic effects are associated with the loss of employment and wages, which can only be compensated to a limited extent by the much needed income support measures introduced by governments (guaranteed incomes, tax relief, etc.). The fall in demand will further slow down production, while the increase in health expenditure is unlikely to have significant expansionary effects on the economy as a whole.
Data on Italy – the first European country hit by the pandemic – may provide some indication of what may happen in Europe as a whole. According to Confindustria, the main business association, 20% of companies have had strong negative effects; some sectors – such as tourism – will be affected far beyond the most acute moments of the pandemic. Furthermore, income support measures may not translate into increased domestic production, but may lead to greater imports (as has happened in the case of face masks and respiratory machinery). After the 2008 crisis, Italy and Southern Europe experienced a 20% fall in industrial production, that has later became permanent. A similar, further weakening of ‘peripheral’ European economies could result from the coming crisis.
Facing the coronavirus crisis, traditional economic policy tools could be ineffective. European monetary policy has long had little effect on the real economy. The indirect stimulus of expansive fiscal policies or tax relief could have a modest impact in the short term. The most effective tool for containing the crisis could be a large increase in public spending for the provision of public services, the purchase of domestically produced goods, and investment in new production activities in the context of a ‘green industrial policy’.
The financial crisis is coming
Finance is an additional driver of the coming crisis. Between February 19 and March 12, 2020, at the Wall Street Stock Exchange the S&P500 index lost 25%; In London the fall of the FTSE100 index was 28%; in Milan the FTSE MIB index lost 40%. Major action has been taken by the US Federal Reserve, announcing $1,500 billion of new liquidity; the ECB, as usual, is trailing behind with €120 billion only of new liquidity announced for the whole of 2020, and without cuts in interest rates. These measures have temporarily slowed down, but not stopped financial instability.
Moreover, the ECB decision on March 12 to provide new liquidity was accompanied by a disastrous statement by President Christine Lagarde: “we are not here to close spreads”, taken from a phrase by the German Member of the Executive Board of the ECB. A major worsening of the spread in interest rates between Italian and German government bonds and a stock market fall immediately followed the statement. The President of the Italian Republic Sergio Mattarella, with an unprecedented intervention, immediately replied that “initiatives of solidarity and not moves that can hinder Italy’s actions” are expected from Europe, leading to a slight correction of Lagarde’s view: ‘I am fully committed to avoid any fragmentation in a difficult moment for the euro area’.
This unprecedented clash between Italy and the European Central Bank reveals the deep divisions in the ECB governing council and how far German and France strategies are from the interests of Italy and Southern Europe. European institutions are unable to face an economic emergency. Without a radical change, the ‘fragmentation’ of the euro area could become one of the effects of the pandemic.
This unprecedented clash between Italy and the European Central Bank reveals… how far German and France strategies are from the interests of Italy and Southern Europe.
The epicentre of the financial crisis, however, is likely to be in the United States. In February 2020 Wall Street stock indexes have doubled their 2007 values, a level which is barely justified by the conditions of the real economy. Extreme financial speculation has been fuelled above all by the belief that, with Donald Trump in the White House, policies to support finance and business and tax breaks for the ruch would allow Wall Street to continue its expansion. The recent expansionary measures taken by the US Federal Reserve in order to stabilize the financial markets, shocked by the spreading of the virus and the drop in oil prices, were still going in that direction, but this time the financial markets do not seem to calm down.
Before the coronavirus pandemic, the most likely scenario for the US was a continuation of financial expansion - artificially supported by fiscal and monetary policies - until the presidential elections in November 2020. A constant in the US political and economic cycle is that there never is a recession on the eve of the presidential vote; adjustments and crises usually occur in the following year. In such a scenario, Trump could have won again, riding on the wave of a growing economy with low unemployment, and relying on the radicalization to the right of his core electorate.
Now the scenario has completely changed. The ability of the United States to control the pandemic is difficult to assess; government actions are now catching up after the early denial of the severity of coronavirus infections. Trump may prove to be an inadequate leader to face the emergency. There is a possibility that everything might collapse: a severe drop in world economic growth, a financial crash, Trump losing the elections, the likely Democratic candidate Joe Biden in charge of restoring some order in 2021.
So far, no specific factor that might blow up a new financial crisis can easily be identified, an ‘explosive device’ which could replicate the role that in 2007 saw the collapse of ‘subprime’ mortgages, the bankruptcy of Lehman Brothers and, later, the public debt crisis in Southern Europe.
Still, the financial system has become very complex and vulnerable; the crisis could erupt at some unexpected point – for instance, the dysfunctionality of the US health system, a bankruptcy of US private health insurance companies, the burden of the massive private debt in the US, or a new public debt crisis in Europe.
An uncertain, fragmented world system
When we consider the international order, we find that the pandemic has made some contradictions more extreme, has increased uncertainty and fragmentation, highlighting the weakness of current governance arrangements.
With the retreat of America and the paralysis of Europe, the West has no project for the world order, in stark contrast to the dynamism of Asia and China.
– Neoliberal globalization is founded on the presence of an open, interdependent and integrated global system; on the other hand, it has drastically weakened global governance arrangements in all fields – health, welfare and the environment in particular. Neoliberalism has produced greater polarization between ‘centres’ and ‘peripheries’, making integration more difficult. Governments and supranational powers have fewer tools to ensure a global order.
– The power of the United States has experienced a prolonged decline (see the analysis of Giovanni Arrighi). The ‘old’ model of American hegemony had maintained global order through a system of power relations, shared rules, alliances and international institutions – including NATO, the IMF, the WTO, etc. Trump’s policy has responded to the loss of hegemonic capacity with an attack on some of the very foundations of the world order built by the United States, questioning the role of NATO and the WTO.
In the name of ‘America first’, searching for short-term economic and political advantages, the US government has chosen unilateralism over international cooperation; it has denied the most dramatic challenges such as climate change and (initially) the severity of the coronavirus pandemic. Such a US policy contributes to global disorder and brings to an end the role of the United States at the centre of the world system.
– With the retreat of America and the paralysis of Europe, the West has no project for the world order, in stark contrast to the dynamism of Asia and China. China has taken on a new economic centrality, characterised by deep internal contradictions – including inadequate health and welfare services, as shown by the start of the coronavirus pandemic in that country – but has also shown a strong ability to deal with problems with large-scale interventions, in the case of both the pandemic and measures to combat climate change. China had remained out of the reach of the 2008 financial crisis and of the recession that followed in the West. Now it could have its economy and stock exchange recover faster than the West. If it showed an effective capacity to address the coronavirus pandemic, China could emerge as a major world player, capable of bringing elements of ‘order’ into the uncertainty of the world system. Faced with the ‘systemic chaos’ associated with American decline, China could emerge with a stronger role and a potential hegemonic capacity.
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