This health crisis has turned into a social, economic and imminent financial crisis

The freedom of movement for half the world’s population halted in April because of the coronavirus. Economies were put in a coma, and this has prevented health care systems from collapsing in many countries. Economies can now start to very slowly reboot, but a multi-headed crisis will make this very hard.

It is important to remember that a return to “normal” will not be possible until there is an effective treatment and/or a vaccine. After all, we are still a long way away from herd immunity; even in a very severely hit city like New York, only 20 percent of the population has developed antibodies according to the first surveys. Epidemiologists say that this percentage would have to go up to at least 60 percent to be able to speak of herd immunity.

Policymakers — even if they do not state it explicitly — will weigh death rates against the economic and social damage. In the end, they hope to strike a balance between, on the one hand, an increase in mortality rates that will probably continue for an extended period, and on the other hand ensuring that the economy and society continue to run as effectively as possible. 

Some governments will give higher priority to directly saving human lives, while others attach more importance to longer-term social and economic factors. It is not necessarily the case that the latter is more unethical than the former; the reasoning could also be that the long-term damage to health and well-being will be more extensive if restrictive measures are too rigidly applied now to save lives.

New York governor Andrew Cuomo said at the end of March: “My mother is not expendable. And your mother is not expendable… We’re not going to accept the premise that human life is disposable. We’re not going to put a dollar figure on human life. We are going to fight every way we can to save every life that we can.”

Fortunately, the first part of this statement is true for almost everyone. However, the second part sounds great, but it is incorrect. All over the world, assessments are made of how much money an extra year of life in relatively good health is worth. If this path weren’t followed, the costs for healthcare would be many times higher than they now are, and expenditure on, for example, education and infrastructure would be crowded out. This would reduce the earning capacity of the economy in the long term and, therefore, taxable incomes, and therefore the taxes required to finance healthcare costs. In other words, we have always made trade-offs between health and the economy, but this balancing act has very explicitly come to the fore now.

One thing is certain: we cannot allow the coronavirus to run its course to ultimately create herd immunity, if only because the vast majority of health care systems cannot cope with this. This is why, in the short to medium term, the 1.5 meters, 2 meters, or 6-foot society — depending on where you live — will continue to be in place in most countries.

What started as a health crisis not so long ago, has developed into a hydra. The lockdowns deliberately created a recession. In the US, about half the working-age population (people aged 16-65) have no wages this month. Economic growth data over the first quarter is deplorable worldwide – and only a few weeks of corona crisis have been included in the data. The data over the second quarter will be far worse.

The global recession also threatens to trigger a financial crisis. U.S. banks are withdrawing from the European credit market as we speak. Financial institutions are accumulating enormous buffers to absorb blows. Although the industry is more robust than it was before the 2008/2009 recession, stress tests did not anticipate the abrupt termination of entire sectors and the complete disruption of societies.

Before the 2008 credit crunch, consumers, in particular, had run up massive debts. Companies have done the same in recent years. Total debt / GDP ratios have reached record levels, even in frugal countries.

Consumers and companies are reluctant to borrow more and/or cannot obtain credit from banks now, and this is why all eyes are on the government. Budget deficits and government debts / GDP ratios will rise to unprecedented levels in peacetime. Central banks are forced to finance these deficits by buying massive amounts of government bonds. Central banks are also increasingly assuming a political role, but reluctantly so. This creates tensions in Europe in particular.

Twelve years ago, the misery started with a financial crisis, which became an economic crisis and ultimately a euro crisis. This time, a health crisis has turned into a social, economic and imminent financial crisis and now it seems to be causing a political crisis as well. Tensions between the U.S. and China are rising rapidly, frictions within the Eurozone are resurfacing, leaders with authoritarian traits are taking advantage of the current situation to boost their position, and globalization continues to decline.

In recent months, politicians have been able to focus on one task — with huge support from the population: flattening the corona curve. Now that the peak seems to be over, voters are starting to complain again, and politicians have to concentrate on more tasks at the same time. At the end of March, the Dutch Prime Minister Rutte said: “We are past the start, but not yet at the end of the beginning.” The sounds of the prelude are fading and the tones of a foreboding suite are swelling.

Andy Langenkamp is a senior political analyst at ECR Research and political commentator, who specializes in assessing the repercussions for the financial markets of economic and geopolitical events.