The costs of the coronavirus pandemic will be enormous and the economic effects severe. Without knowing their size, we can suggest their nature and possible dimensions; they are likely to vary greatly with policies adopted in the United States and the European Union.
The current medical wisdom emphasizes “test, contain and cure” in order to defeat the infection. The dominant means of containment has become social distancing; in effect, much of the service sector – tourism, hotels, theaters, sports, movies, restaurants, bars and most transportation of people – has been closed down, while cargo transportation and most manufacturing continue. Presumably, 30 percent of value-added activities are being stopped. If we assume that these stoppages may last for three months, 7.5 percent of GDP will disappear this year. Since no investment is being undertaken and no additional capacity is at hand, GDP can hardly decrease less. As GDP in advanced countries fell by 3.3 percent in 2008-2009 during the global financial crisis, this would be roughly twice as much.
The closures of enterprises can either be consecutive or coordinated. As events have evolved in Europe and the United States, the closures have been gradual rather than coordinated; much valuable time to combat and contain the disease has been missed. In the United States, federal policy has been missing, leaving to state governors to lead policymaking.
In Europe, the European Commission has been similarly absent, leaving to each EU country to pursue its own policy. In the end, most of them have closed their borders, but without coordination. The Schengen area of 26 countries without border controls has been broken up, and it is unclear whether this highly appreciated EU achievement will be re-established.
The closure of private enterprises is very different in Europe and America. In the United States, workers are swiftly laid off with little or no severance pay, and many enterprises disappear. Thus, the United States recorded 6.6 million newly unemployed in the week ending March 28. In Europe, labor markets are much more inert; workers often are not laid off for good. The German term Kurzarbeit – work for only three or four days – has become international. The disruption is less severe, though major restructuring is being held back.
The financial crisis brings additional costs, which are more difficult to assess. The lessons from the 2008-2009 global financial crisis are to apply massive amounts of monetary and fiscal stimulus early on. As the leading central bank in the world, the U.S. Federal Reserve holds great responsibility. Sensibly, it has already offered large swap lines of U.S. dollars to 14 major central banks, as in 2008, to avoid a global liquidity freeze.
Whenever an epidemic is apparent, the authorities had better throw all resources available at it. Centralized procurement of necessary supplies should be Alpha and Omega — the beginning and the end. Embarrassingly, neither Europe nor the United States did this. Only at the end of March did the European Commission manage to organize centralized procurement, leaving its members on their own. Worse, several countries with medical supplies prohibited their exports, notably Germany, which prohibited exports to Italy in the midst of the latter’s suffering.
Instead, China and Russia offered Italy some timely deliveries. Before the EU, NATO managed to act. Strangely, the U.S. federal government, with all its military resources, seems to have been out of action in many respects.
Plenty of statistics on the pandemic are available. The rise in the curves of the infected and of death rates vary greatly among countries. So far, three Western countries stand out as particularly unfortunate in their inability to contain the epidemic, namely, Italy, Spain and the United States. Most Eastern European countries closed their borders and introduced checks early on. The North Europeans have more resources for testing and treatment, with their stronger public medical systems.
COVID-19 is likely to bring about major changes to Western society and economies. Presumably, borders will no longer be so open to travelers. The inability of countries to receive medical supplies will enforce demands for more localization. The failure of the existing health care systems will raise demands for stronger public health care. The possibly greatest unemployment since the 1930s will call for a stronger social safety net, with more unemployment and health care insurance.
The economic changes might become even greater. Suddenly, many people are working at home, where they have most of what they need. Are costly, boring office buildings something of the past? Should we have home offices and cafes instead of old-style offices? Why waste so much time and money on business travel in the era of Zoom and Skype? Do you really want to risk being infected on a giant cruise ship? Who wants to go to crowded Venice at great cost, and risk being infected with some new virus?
The apparent winners in all of this are the big high-tech companies that help us overcome all the physical and geographic hurdles: Fast, and cheaply, Amazon and other internet “shops” deliver when ordinary retail trade falters; Google and numerous news websites inform us about what is happening in the world; Microsoft and others provide us with the necessary software. During the dotcom collapse in 2000, the premature internet companies failed. During COVID-19 they might have scored their ultimate victory.
Anders Åslund is a senior fellow at the Atlantic Council. His most recent book is “Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy.”