Clash over Eurobonds Widens Rift in Eurozone

[caption id="attachment_14872" align="alignright" width="300"] Eurogroup Chairman: Mario Centeno[/caption]

Sixteen hours into their videoconference, sleep deprived Eurozone finance ministers early this morning agreed to disagree and try again for consensus later today. Eurogroup Chairman Mario Centeno suspended the discussion and said a deal was close, but still out of reach. The inconclusive marathon meeting was meant to find additional ways to funnel cash to fiscally weaker Eurozone members as the pandemic takes a sizeable bite out of their slow-moving economies and unhinges precariously balanced budgets. It was also hoped to put a stop to the almost incessant bickering that has marred relations between member states.

However, Dutch Finance Minister Wopke Hoekstra, the bogeyman of the ‘Club Med group’ led by Italy, stood firm throughout the proceedings and simply refused to contemplate the possibility of issuing Eurobonds, or any other form of mutualised debt, irking nearly all participants with the notable exception of his German colleague Olaf Scholz who kept mostly silent and was only too happy to shield behind the obtuse Dutchman.

Minister Hoekstra did reluctantly agree to allow for the disbursement of funds from the €410 billion European Stability Mechanism (ESM) to cover unforeseen medical expenses, but he remained unwilling to waive the strict conditions attached to pay outs of a more general nature. After a good 14 hours of talks, The Hague was the last holdout as Mr Hoekstra flatly refused to budge. Whilst tensions flared between the Dutch and Italians, some ministers apparently lost interest and dozed off.

Just hours before the start of the meeting, the Minister Hoekstra had received the near-unanimous support of parliament for his standpoint with individual members vowing to block any attempt to ‘infect’ the prized AAA credit rating of their country by sharing risk with less prudent Eurozone countries. On national television, Minister Hoekstra explained that the Dutch government was eager to help fellow EU member states deal with the financial consequences of the pandemic. He likened the outbreak to a house being on fire. Mr Hoekstra said that the Dutch will provide all assistance needed to extinguish the blaze but cannot reasonably be expected to take over the mortgage on the house.

A French proposal to allow for a one-time only limited issue of ‘coronabonds’ was also unceremoniously shot down by Mr Hoekstra, causing his French colleague Bruno Le Maire to suffer a fit of anger during which he appealed to stop ‘this clownesque show’. The finance ministers discussed three proposals, totalling some €540 billion, that added to the emergency measures already implemented by national governments, the European Union, and the European Central Bank (ECB) would by far surpass the $2.2 trillion US aid package approved by Congress in late March.

The clash between The Hague and Rome went further than just Eurobonds and also involved the conditions that rule access to ESM funds. Although the Dutch agreed to deploy these funds to help kickstart the post-corona recovery, they insist on demanding fiscal reforms from countries accessing ESM money. The only concession Minister Hoekstra was prepared to make involved oversight by the much-despised ‘troika’, a cabal of inspectors from the European Commission, ECB, and International Monetary Fund charged with monitoring compliance. Mr Hoekstra agreed to do away with the troika and find other ways to check for progress on reforms. However, that fig leaf was immediately rejected by Italian Finance Minister Roberto Gualtieri for being ‘offensive’.

The Italian government strongly feels that the northern EU member states fail to recognise the almost unprecedented severity of the crisis which it considers an existential threat to both the nation and the continent. The country faces its deepest recession since the end of World War II and senses that less affected nations do not yet fully grasp the implications of the pandemic and the need for solidarity.

Former minister of Economic Development and self-confessed Europhile Carlo Calenda warned of a ‘massive shift’ taking place in his country with a growing number of Italians questioning the use of the European Union: “The impression is that Italy has been abandoned by northern member states and may be better off on its own.”

A recent survey confirms that shift and showed that 67 percent of respondents feel that belonging to the European Union does not benefit the country – up from 47 percent one year ago. Former European Council President Donald Tusk chipped in and warned that the pandemic may prove even more dangerous to EU cohesion than the euro crisis was a decade ago: “The loss of reputation is huge.” Mr Tusk, who now leads the centre-right European People’s Party, said that the power of perception must not be underestimated: “Whilst northern member states have already provided substantial aid to Italy and Spain, a few cargo planes with medical supplies arriving from Russia and China receive all the credit. That may not reflect reality but is what people remember.”

Those same perceptions take centre stage in the widening rift between Europe’s purportedly frugal north and the apparently profligate south. However, as a hot topic the issuance of Eurobonds or any other form of mutualised debt is a moot point and merely represents a political show put on for the benefit of domestic audiences. After the European Central Bank in March solemnly promised to buy up all government bonds issued by Eurozone members, ditching its rulebook in the process, euro-denominated debt has already been mutualised for all practical intents and purposes.

Moreover, the European Commission last month agreed to relax the terms of the 1997 European Stability and Growth Pact that underpins the euro. This pact limits fiscal deficits to 3 percent of GDP and national debt to a ceiling of 60 percent of GDP. However, few countries outside Germany, The Netherlands, Finland, Austria, and the Baltics abide by the rules. Thus, the relaxation or removal of these merely theoretical checks on fiscal imprudence is meaningless to countries already ignoring them as a matter of course.

Though Mr Hoekstra, and the less outspoken finance ministers happily riding his coattails, may contribute to the discussion by tabling a great many recriminations, that does not help end the present impasse. Rather, it serves to undermine the EU’s credibility and adds an extra layer of complexity to an already challenging scenario that baffles all governments equally.

Italy, for its part, would perhaps be well-advised to accept a compromise solution in recognition of its own well-known refusal to fix the proverbial roof when the sun was still shining. Messrs Hoekstra and Gualtieri must come to terms with the irrefutable fact that they are living in the same house which is indeed on fire.

Unless the recriminations stop and a way forward is found ‘pronto’, Europe’s future looks particularly bleak. The Hague and Rome need to tone down the rhetoric and get to work shaping the post-corona future whilst ensuring the continued relevance of the union that delivered prosperity to all EU member states, albeit in different forms.


The Fabric, and the Notion, of EU Solidarity is Being Ripped Apart

Italians are suffering – but they are also angry and defiant. EU flags are being burned. On social media, Italy’s citizens are telling each other, and the world, that “we will save ourselves”.

Prime Minister Giuseppe Conte is pleading for EU solidarity as Matteo Salvini, leader of the far-right Northern League, denounces the organisation. In Spain, emotions are also running high; on the periphery, Serbian President Aleksandar Vučić has condemned European solidarity as nothing more than “a fairy tale”.

Covid-19 is testing the mettle of the EU – and the lasting impacts are likely to outlive the health crisis.

The absence of a co-ordinated EU response to the pandemic has been conspicuous. Even the refugee crisis of 2015 saw greater solidarity. Despite meetings between national leaders and various ministers of finance and health, there has been little sign of consensus, or action, from Brussels.

Part of the problem is that there is no central EU healthcare policy. It’s a contentious subject. Member states have largely retained individual control, making it difficult to put together a unified response. The European Centre for Disease Control and Prevention was created in 2005, and an civil crisis response institution, RescEU, came into being last year. Neither organisation has the power or resources to make meaningful inroads into the effects of the pandemic.

The common threat has so far led to dysfunction rather than solidarity, with the unilateral travel restrictions imposed by member states standing out as an example. On March 16, the EC put restrictions on non-essential third-country (non-citizen) travel into the Schengen zone – but nothing was said about travel between member states. An extension to those third-country restrictions was announced in early April, and while internal EU restrictions were mentioned, co-ordination remains a goal rather than an achievement.

Some states have also imposed bans on the export of medical goods. The European Commission has fought for an EU-wide response to such actions, but several members have again acted unilaterally.

Unsurprisingly, financial support is the major point of contention. Italy, France, Spain, along with the European Central Bank and other bodies, are pushing for an EU-guaranteed “corona-bond”. Funds are needed to tackle the pandemic, they say, and to help businesses survive. Bonds could deliver – and low interest rates.

Germany, Holland, Austria, and Finland are resisting the idea. They argue that the European Stability Mechanism (with an available €410bn) is the appropriate instrument – and, unlike any “corona-bond”, it is ready to be used right now. But after the Greek debt crisis, the ESM is synonymous with austerity. Italy and Spain see that as punishment, not a solution. Debate continues, and delay is costly.

Measures such as the €37.8bn Coronavirus Response Investment Intiative are positive, but likely to be dwarfed by the magnitude of the problem.

Co-ordination is also needed in the area of scientific research. The president of the European Research Council, Mauro Ferrari, has resigned over the EU’s inaction. He had been pushing for a concerted scientific programme to combat the pandemic, but was blocked by the governing board. His approach was seen as too “top-down”. In a letter to The Financial Times, Ferrari said: “I arrived at the ERC a fervent supporter of the EU, but the Covid-19 crisis completely changed my views.”

The EU has faced existential crises before, but this one is potentially the most damaging to the its foundational ideals. If a union can’t unite, then what is its purpose? Italy and Serbia are receiving aid from China and Russia, feeling betrayed at home.

Even if the controversy is different to the those thrown up by the Greek debt crisis and unlawful migration, each day of separation further splits the fabric, and the notion, of EU solidarity.


Otaviano Canuto: More Than One Coronavirus Curve to Manage - Infection, Recession and External Finance

Flattening Coronavirus Curves – Otaviano Canuto

First appeared at the Policy Center for the New South

The global reach of COVID-19 is now clear. In a short time, country after country has suffered outbreaks of the new coronavirus, with each facing a three-fold shock: epidemiologic, economic, and financial. In addition to dealing with their own local coronavirus outbreaks, emerging market and developing countries have faced additional shocks from abroad.

Flattening pandemic curves saves lives

The coronavirus crisis is primarily a public health issue, demanding containment policies that inevitably lead to shocks to economic activity. A major reason for containment is the widespread perception that, given the dynamics of infection—and corresponding numbers of people in need of clinical care—local clinical care capacities risk being swamped, with higher death tolls, in a ‘do-nothing’ scenario. Therefore, policies to flatten the pandemic curve and gain time become vital, regardless of whether or not they reduce the absolute number of infected cases. Figure 1 from Gourrinchas (2020) illustrates the point. Even assuming that the overall number of infections would be the same, with or without public health containment policies, lives are saved if the curve is flattened.

[caption id="attachment_14886" align="aligncenter" width="702"] Figure 1: Flattening the Pandemic Curve. Source: Gourrinchas (2020)[/caption]

Two major types of policy to contain or simply slow the spread of coronavirus have been applied. The first is to identify and quarantine infected people. This approach has been pursued in Singapore, Taiwan, and South Korea. There are two prerequisites for such an approach to be successfully implemented: there must be government capability to use technology and information to track and monitor individuals, and the ability to apply widespread coronavirus tests to the population. That is not the case in most countries.

The second type of containment policy is to adopt social distancing, with various degrees of government enforcement, including minimizing person-to-person contact by banning travel, temporary closure of workplaces and schools, and official recommendations or orders for people to stay at home. Such horizontal approaches include some demarcation of essential activities, which are excluded from physical mobility restrictions. Social distancing can be used in combination with the selective focus wherever there is capacity to do the latter.

The pandemic curve generates a recession curve that also needs to be flattened

The coronavirus pandemic has led to both negative demand and supply shocks to the economy. While demand and supply would in any case be negatively impacted in a do-nothing scenario, the impact tends to be exacerbated by social distancing policies.

As Hinh Dinh (2020) aptly remarked: “a COVID-19 crisis is likely to be more disruptive, yet of a shorter duration than a recession.” Notwithstanding its shorter duration, its disruptive nature may leave ‘scars’, impeding a return to the point the economy was at prior to the shock. Solvent but suddenly illiquid firms may go bankrupt, unemployment rises rapidly, demand and revenues for small businesses rapidly vanish…

That’s where an extraordinary role of the state as a catastrophe insurer comes to the fore, providing fiscal support—additional resources for healthcare systems, income transfers to crisis-affected people, tax relief—and credit available at favorable conditions to vulnerable firms. These emergency and temporary measures, with rising public debt as the form of finance, are geared to minimize the disruptive consequences of the temporary but deep sudden stop of the economy. Figure 2 illustrates such a flattening of the recession curve, happening in tandem with the flattening of the pandemic curve.

[caption id="attachment_14887" align="aligncenter" width="610"] Figure 2: Flattening the Recession Curve. Source: Gourrinchas (2020)[/caption]

Is there a trade-off between saving lives through containment policies and the output losses that are their consequence? Using the historical experience of the 1918 Influenza Pandemic, Correia et al (2020) found that cities where non-pharmaceutical interventions took place earlier and more aggressively did not perform economically worse and, if anything, grew faster after the pandemic was over. Their findings suggest that “non-pharmaceutical interventions not only lower mortality, but also mitigate the adverse economic consequences of a pandemic” (Correia et al, 2020). The economic havoc wreaked by the pandemic in a ‘“do-nothing”’ scenario cannot be assumed to be greater than in a scenario with containment policies.

Developing countries face additional shocks from abroad

Dinh (2020) gives several reasons why flattening both the coronavirus infection and the recession curves in non-advanced economies is likely to be harder. Developing economies have faced simultaneous shocks from their external environment, as pandemic and recession curves unfold abroad. In addition to supply shocks derived from unavailable imports that are key to local value chains, in poorer countries, commodity prices, tourism, and remittances have collapsed (Canuto, 2020). Furthermore, the third part of the coronavirus crisis—shocks to finance—have also hit developing countries.

The pandemic and economic aspects of the coronavirus dynamics triggered shocks to financial markets in advanced countries. The prospects of deteriorated earnings and heightened uncertainty have led to a broad portfolio switch from risky assets to the safe haven of U.S. short-term Treasuries. Given the high levels of financial leverage from previous years—including non-banking financial institutions that have become major market makers—successive margin calls have sparked massive asset fire-sales and exacerbated their price falls.

The Federal Reserve has opened an extensive toolbox, establishing new or reinforcing existing channels to make sure that liquidity is conveyed to all corners of the financial system. Rather than lifting again asset prices, the aim seems to be to avoid bankruptcies and short-circuit all the negative feedback loops and channels of contagion that otherwise would hit the real economy.

The search for safety sparked by uncertainty and fear has led to a strong wave of capital outflows from emerging markets (Figure 3) and depreciation of their currencies. According to the Institute of International Finance, foreign investors have taken US$83 billion out of emerging markets since the beginning of the crisis, the largest capital outflow ever recorded. Concerns about debt repayment capacity and the dollar liquidity needs of some emerging markets have increased, raising the odds that the coronavirus sudden stop in advanced economies might cause a sudden stop in capital flows to emerging economies.

Poorer developing countries have built up high and unsustainable amounts of foreign debt in the recent past (Kose et al, 2019). Servicing that debt at a time of drought in sources of refinance has become harder as commodity prices and tourism have slumped. All this is happening at the same time as those countries need to face the task of flattening their domestic pandemic and recession curves. The International Monetary Fund and World Bank have called on governments to offer debt relief to help developing countries deal with the coronavirus outbreak.

[caption id="attachment_14888" align="aligncenter" width="899"] Figure 3: Emerging Markets - Non-resident Portfolio Flows and Net Capital Flows. Source: IIF and J.P.Morgan estimates[/caption]

Given current constraints on liquidity and long-term financial provision posed by the balance sheets of multilateral institutions, some ideas about the use of the IMF and the World Bank as vehicles for extending the reach of central bank policies in advanced economies to developing countries have been floated by Hausmann (2020). For instance, US Federal Reserve swap lines recently signed with central banks of other countries could be extended beyond the group that has been recently included (Australia, Brazil, Denmark, Korea, Mexico, Norway, New Zealand, Singapore, and Sweden), either directly or with IMF intermediation. Another mechanism could be the inclusion in the quantitative easing being done by advanced economies’ central banks of the acquisition of less-risky emerging-market bonds, which would create space for international financial institutions to focus on poorer countries.

We need poor and middle-income countries to successfully defeat coronavirus, otherwise it will bounce back to strike all of us.

Otaviano Canuto, based in Washington, D.C, is a senior fellow at the Policy Center for the New South, a nonresident senior fellow at Brookings Institution, and principal of the Center for Macroeconomics and Development. He is a former vice-president and a former executive director at the World Bank, a former executive director at the International Monetary Fund and a former vice-president at the Inter-American Development Bank. He is also a former deputy minister for international affairs at Brazil’s Ministry of Finance and a former professor of economics at University of São Paulo and University of Campinas, Brazil.


Big Egos, Poker Faces, and Deep Pockets Meet to Address Oil Glut

[caption id="attachment_14895" align="alignright" width="300"] President Putin[/caption]

President Vladimir Putin of Russia has a poker face and knows how to use it. A real-life display of his diplomacy-on-ice takes place today as OPEC oil and energy ministers meet online to discuss ways to avoid a further collapse of oil prices. Non-member Russia has been invited to join the virtual get-together and the United States may also make an informal appearance in what market watchers dubbed the advent of OPEC++. The expanded roster reflects the sense of urgency within and without the organisation.

Founded in 1960 to bundle the power of oil producing and exporting countries, OPEC has of late become a somewhat marginalised forum of nations unable to even agree to disagree. Member states mostly ignore production targets as they seek to capture market share and drive competitors out of business.

Russia has been particularly successful at exploiting divisions within OPEC as it wrestles with Saudi Arabia for leadership of the sector. Moscow also seeks ways to exact revenge on the United States for the tightening of sanctions over its meddling in the Ukraine and other supposed misadventures such as the Nord Stream 2 pipeline. One way of getting even is to drive US producers of expensive shale oil out of business by aggressively lowering prices.

In early March, Russia abruptly terminated an agreement reached with Saudi Arabia in 2016 and aimed at limiting production volumes in order to support crude prices. The deal was scrapped after Russian oil minister Aleksandr Novak angrily refused to honour a renewed Saudi request for deeper production cuts. A barrage of recriminations followed with the Russian minister vowing to flood the market and the Saudis promising to do likewise.

However, it has since transpired that whilst Riyadh took Mr Novak at his word and duly ramped up daily oil production to as much as 19 million barrels – more than double the volume pumped in normal times – the Russians kept their production levels largely unchanged, refusing to engage in a losing proposition.

The oil spat coincided with the spread of the corona virus that ground the global economy to a halt. Demand for crude oil dropped by at least 25 percent as airlines stopped flying, cars sat on driveways, power plants cut output, and winter failed to bite. This perfect storm drove crude prices to lows not seen in almost 20 years and saw the largest quarterly percentage decline on record. By late march, West Texas Intermediate scraped the $20-a-barrel level with some lesser crudes trading at $10 or less a barrel.

Thus, US President Donald Trump got what he wished for: cheap oil. Not usually one to think more than a few baby steps ahead, the Trump Administration now reluctantly admits that slightly less cheap oil may be not so bad after all. US producers of shale oil are dropping like flies. In order to cover their cost of production, they need a crude price of at least $42 a barrel. The Department of Energy noted that daily production volumes have already dwindled by about 300,000 barrels in March. US oil output may slump by as much as 2 million barrels a day by year’s end. In an attempt to stabilise the global energy market, President Trump called on his Russian counterpart to cooperate towards this goal. President Putin of course agreed on the importance of calming the market and promised, rather ambiguously, that Russia would do its part.

As the US reluctantly prepares to coordinate with OPEC, Russian Oil Minister Novak warned that a ‘natural decline’ in production will not count towards any cuts to be agreed upon. Mr Novak is aware that the US government may actually lack the power to impose ceilings on its small shale oil and natural gas producers. He also realises that these companies are very nimble and can adjust their output quickly to changing market conditions. Each time the Saudis or Russians think that pesky shale oil has been put out of business, the sector bounces back to spoil OPEC+ targets and plans.

After OPEC++ meets today, the oil and energy ministers of the G20 get together on Friday to consider the outcome and find additional ways to adjust production to the reduced demand. In fact, the world is quickly running out of places to store excess oil. Tank farms are just days away from reaching capacity whilst entire fleets of old tankers are saved from the breakers yard and rushed into service as floating storage facilities.

Land-locked oil producing countries are hardest hit. Some have seen well-head prices for crude dip into negative territory as hauliers have nowhere to unload their cargoes. In Canada, new lows were recorded in the last week of March. With pipelines saturated and local tank farms topped up, West Canada Select – more than two thousand kilometres distant from the closest tanker storage facility – was being traded at $4.18 a barrel.

Analysts at Goldman Sachs estimate global storage capacity at around one billion barrels and caution that maximum capacity may be reached in weeks rather than months. In a report to investors released earlier this week, the market watchers of the US investment bank point out that the supply overhang from the global lockdown is so big that storage capacity will be exhausted soon even if OPEC and other producers manage to restrict output.

Though there is a common desire, and urgent need, to close the tap – if only to limit the financial damage suffered by Russia, Saudi Arabia, and other major producers – it is by no means certain that Moscow will sign on to any initiative supported by either the Americans or the Saudis. The forces ruling the global energy market include large egos and hurt feelings. The Saudis, determined to rule supreme in the global energy market, seem unwilling to take on the heaviest burden as they have often done in the past by scaling back production much more than others. Though the Saudi government may in the end grudgingly acquiesce to US demands for considerable cutbacks, Russia is unlikely to respond to such strong-arm tactics.

What oil producing country cannot do may ultimately be accomplished by the market. ExxonMobil CEO Darren Woods stated the obvious when he mentioned the unstoppable force of business economics: “When there is no demand for a product, you eventually stop making it.”

Though Saudi Arabia is able to pump oil profitably at a well-head price of less than $10 a barrel, the International Monetary Fund calculated that the country needs a price of at least $80 in order balance its budget. The fund fears the deficit could balloon to 40 percent of GDP should the oil price remain at or around its current level.

At Energy Intelligence, Director for Market Research Abhi Rajendran does not expect that to happen and predicts a firm rebound in 2021 and incremental price increases thereafter. He sees a return to $80-a-barrel oil within three years and expects Saudi Arabia to further increase its market share. Mr Rajendran notes that the Saudi government again sticks to the traditional formula of ‘short term pain for long term gain’ which always worked in the past and is likely to do so again.

In a tug of war with the Saudis, a poker face undoubtedly helps but is still trumped by deep pockets and even deeper wells.


World Bank Readies $160 Billion Emergency Aid Package

[caption id="attachment_14898" align="alignright" width="300"] IMF MD Kristalina Georgieva (left) speaks at a press briefing with World Bank president David Malpass on Covid-19 in Washington, DC, the US, March 4 2020. Picture: AFP/NICHOLAS KAMM[/caption]

World Bank President David Malpass has joined IMF Managing Director Kristalina Georgieva in urging bilateral creditors to extend debt relief to poor countries struggling to cope with the corona virus. “Many countries will need debt relief. This is the only way they can concentrate any new resources on fighting the pandemic and its economic and social consequences,” said Mr Malpass during a meeting of the IMF’s International Monetary and Financial Committee. Mrs Georgieva warned that many low-income countries already suffer a high debt load and depend on official creditors for funds to fight the pandemic.

The  is putting the finishing touches on an aid package worth some $160 billion in emergency funding over the next 15 months. In a statement issued after a virtual meeting of G20 leader in late March, Mr Malpass explained that the World Bank seeks to shorten the time to recovery and “create conditions for growth, support small- and medium-sized enterprises, and help protect the poor and vulnerable.” He also emphasised that the bank works tirelessly to strengthen the ability of developing nations to respond to the pandemic.

According to Mr Malpass, the World Bank now has pandemic-related projects underway in 56 countries. Additionally, the bank is restructuring existing projects in 24 countries to free up funds for public healthcare. Mr Malpass said that he is particularly concerned about ‘poor and densely populated’ countries such as India that need massive investments to scale up healthcare and related sectors.

The bank’s teams are currently finalising some $2.8 billion in emergency disbursements under the $14 billion Fast Track Facility which includes a mix of grants, credits, and loans. A new framework has also been proposed to streamline and expedite the processing of requests and tailor operations to the specific epidemic status of each country.

The International Finance Corporation (IFC), the private sector arm of the World Bank Group, has freed up an initial tranche of $8 billion to help companies preserve jobs and weather the economic downturn. The corporation has mobilised its resources to offer immediate support to about 300 businesses across emerging markets that had already been approved for financing. The IFC has also provided $545 million in facilities through its Global Trade Finance Program. The bulk of this credit went to low-income and fragile countries in Sub-Saharan Africa and the MENA region.

In order to draw in private investors, the IFC has boosted the resources available to the Multilateral Investment Guarantee Agency (MIGA), also part of the World Bank Group, by $6 billion. MIGA provides political risk insurance to private sector lenders and investors.

Though the World Bank’s $160 billion package seems modest when compared to the trillions of dollars and euros being hastily disbursed in the United States and throughout Europe, the bank usually manages to leverage its operations by engaging with private creditors. Once the World Bank has given a project its stamp of approval, private sources of funding often open up and follow through.

World Bank President Malpass has taken the lead in promoting the coordination of relief efforts by multilateral lenders. He has hosted a number of conference calls with the heads of regional development banks such as the European Investment Bank, Inter-American Development Bank, and others to seek co-financing for current and future World Bank operations. Mr Malpass also reiterated the importance of cementing common procurement and logistics programmes and involving the private sector in all initiatives. Mr Malpass said that he received a ‘very positive’ response from multilateral lenders to work on a comprehensive debt relief initiative for low-income countries.


Waiting for the Government to Come Knocking

Streamlined to a skeleton, the US federal government is singularly unable to keep up with politicians eager to dole out trillions of dollars to businesses and individuals caught short by the pandemic. Jolted out of their small-is-beautiful philosophy, lawmakers and administrators suddenly realise that late US President Ronald Reagan may have been wrong when he decreed that government is the source of all evil.

Whilst an entire nation waits for someone to come knocking at the door with the words ‘I’m from the government and I’m here to help’, another 6.6 million Americans last week joined the queue to register for unemployment benefits. Since the pandemic hit US shores, now some six weeks ago, more than 16 million workers have lost their job. Trillions of dollars legislated into existence to support the economy whilst the corona virus rages are stuck in a bureaucratic limbo. Just a tiny fraction of the cash has reached the intended recipients. Above all, deliverance requires patience.

The Internal Revenue Service is geared for receiving cheques, not for cutting them. The federal tax apparatus balks at attempts to reverse the flow of cash. The first of the individual support cheques are not expected to reach households before the end of next week. Main street banks suffer the same affliction: used to dwell on the receiving end of bailouts, they find it almost impossible to distribute federal monies amongst their distressed business clients.

Though the Federal Reserve instantly buys up 95 percent of emergency loan portfolios, effectively eliminating all but the tiniest sliver of risk, bank managers who previously had no qualms in dispensing no-doc mortgages, now display a sense of financial rectitude and caution that beggars belief. As a result, the backbone of the US economy is crumbling as untold thousands of small- and medium-sized businesses are being shuttered.

Charged with handling the disbursement of emergency loans via commercial banks, the Small Business Administration (SBA) is struggling to cope with the surge in demand. In normal times, the federal agency guarantees about $30 billion worth of business loans in a year. It now has to process that volume in a single day.

Understaffed and running on a museum-quality computer network huffing and puffing along on Windows XP, the SBA is woefully ill-equipped to respond to any emergency, let alone one of apocalyptic proportions. Whilst in Washington officials celebrate the decisive federal response to the economic fallout of the pandemic, bankers and business owners wonder where the $349 billion earmarked for the SBA languishes. The delay in getting cash out causes a great deal of frustration in the business community, forcing a growing number of entrepreneurs to just turn down the lights and walk away.

Though most lawmakers on the hill understand the need for out-of-the-box thinking, speed, and scale, the structures that must implement their policy initiatives are creaking and buckling under the pressure. Congressional moves to approve another $250 billion in emergency cash for the business community will only add to the systemic stress. Sensing the makings of a much greater than expected cash crunch, Senator Josh Hawley, a Republican from Missouri and until recently a big fan of small government, on Thursday suggested the federal administration cover the payroll of any US business up to 80 percent of the national median wage. However bold an idea for a card-carrying conservative to spout, it came way too late to make any difference outside the Beltway where real misery is spreading almost as fast as the corona virus.

Already over a month ago, a number of European governments moved swiftly to pre-empt an outbreak of mass unemployment by guaranteeing up to 90 percent of the wage bill of private companies in return for a pledge not to lay off workers. In countries such as Austria, Denmark, Germany, The Netherlands, and the United Kingdom the vast majority of furloughed employees did not suffer a dip in their wages which unfailingly arrived on the usual day of the month. Companies were able to suspend operations without much pain or drama, and are preserved in a form of cryogenic suspension, ready to be revived more or less intact once the virus has been contained.

Meanwhile in the US, President Donald Trump chose to ignore the lengthening breadlines and merrily announced the imminent arrival of an economic ‘boom’. At Moody’s Analytics, forecasters have their doubts and expect another 30 million or so Americans to lose their job in the weeks ahead before the market bottoms out.

In Europe, a cautious optimism was palpable after Eurozone finance ministers on Friday agreed on a €500 billion bailout programme for countries that need additional support to deal with the pandemic. Italy and The Netherlands buried the hatchet and decided to kick the proverbial can down the road, agreeing not to mention the word ‘eurobond’ for the time being. Italy got the easy access it wanted to the €410 billion European Stability Mechanism (ESM) fund from which the country may obtain up to €38 billion without the need to promise reform or accept oversight. The Netherlands also got what it wanted and need not worry about the mutualisation of sovereign risk: eurobonds are off the table.

Agreement was possible only after Austrian Finance Minister Gernot Blümel publicly came out in support of his beleaguered colleague Wopke Hoekstra, saying that the Dutchman did not stand  alone in his rotund rejection of eurobonds: “The perception that The Netherlands is the only country to oppose the issuance of shared debt does not reflect reality. In fact, Austria supports the Dutch on this, as do many other Eurozone member states that are in no mood to make any concessions on eurobonds.” Minister Blümel explained that whilst ‘everybody’ wants to help Italy, Spain, and others deal with the economic consequences of the pandemic, this support cannot undermine the financial resilience of the fiscally more frugal Eurozone members.

After the deal had been sealed, Mr Hoekstra tweeted that EMS funds are available without strings attached to cover medical expenses: “Funds will also be available for economic support, but with conditions. That’s fair and reasonable.” He also reiterated that his government remains opposed to eurobonds or any other form of mutualised debt.

Whilst despised in the south, the unflappable Dutch finance minister received much, albeit muted, applause elsewhere in the union for remaining perfectly calm in the face of Italian theatrics. Prime Minister Guiseppe Conte did not help himself, or his country, by loudly proclaiming just before the Friday meeting got underway that the recalcitrant Dutch were pushing the European Union over the edge of a precipice. Though supportive of eurobonds and critical of the Dutch position, the finance ministers of Spain, Portugal, and France ultimately failed to back up Italy, realising full well that Mr Hoekstra also acted as a proxy for Germany – the arbiter of last resort in nearly all European matters.

Whilst Rome may be more distant than ever, The Hague has now solidified its position as the leader of the frugal bloc, aka the Hanseatic League 2.0, the informal collective of eight Eurozone member states share an appreciation for fiscal prudence. Thus, The Netherlands has neatly slipped into the rebel-with-a-cause position vacated by the British after the UK left the European Union earlier this year.


The Final Destiny of the Trillions

When the going gets though, the weak are moved aside. A depressingly large number of the 181 US corporations that last year signed a solemn pledge to fight inequality and work for the benefit society have failed to honour their word. Take retail giant Macy’s: whilst furloughing most of its workers, the company earlier this month paid out $116 million in dividends. Yet, the iconic department store mobilised its lobbyists in Washington to plead with Congress for the relaxation of the conditions attached to the $454 billion federal emergency lending programme. Macy’s and other large companies cannot access the monies because of their poor credit ratings. The retailer sank into junk territory even before the pandemic hit.

In March, the world’s largest hotel operator Marriott International, notified the Securities and Exchange Commission that it intended to shovel another $160 million to its shareholders on the last day of the month. The company also said that its chief executive Arne Sorenson would forgo his $1.3 million annual salary as an expression of solidarity with the thousands of workers sent home on unpaid leave.

However, the company failed to mention that Mr Sorenson negotiated a 7.7 percent salary increase for next year plus a cash bonus of up to 200 percent. In February, he also pocketed more than $3.5 million under the company’s non-equity incentive plan. In a video message to his former ‘associates’, Mr Sorenson wished them the best of luck and good health. Since 2011, Marriott International spent an estimated $16 billion in stock buybacks to drive up its share price. Still, the US hotel industry has asked for $150 billion in federal support monies to ride out the corona storm.

Marriott International is by no means an exception as large companies struggling to survive the pandemic shred the polished Business Roundtable document that was supposed to herald the coming of a new age in corporate social responsibility. Signed only last year, the pledge has now been exposed as an artful piece of empty rhetoric. Only a handful of key signatories kept their commitments. Though perhaps not immune to criticism, Apple, Amazon, Pepsi, and a number of major US banks, moved quickly and decisively to protect their workers and roll out additional benefits to lessen the impact of the pandemic.

In the UK, a likewise deplorable cynicism also set the mood in some of the country’s most iconic businesses that have been quick off the mark to cash in on government largesse. Experienced billionaire tax dodger Philip Green, who took up residence in Monaco to keep the taxman at bay, has brazenly asked the government for help in keeping his Arcadia retail empire afloat. Mr Green has taken out large loans via his company to reward himself with equally large dividend pay-outs. His predatory business practices are by no means the exception in a country that still celebrates wealthy entrepreneurs who need state-supplied crutches to remain standing.

Much admired for his entrepreneurial savvy and flamboyant ways, the real talent of Sir Richard Branson seems to lie in milking the British taxpayer. Under the guise of saving jobs and preserving companies too-big-to-fail, Mr Branson regularly takes his begging bowl to Whitehall where he collects untold millions to keep his enterprises afloat. He is also an undisputed master in tax engineering, structuring his corporate empire in Byzantine ways to minimise its fiscal exposure. Though addicted to tax handouts, Mr Branson dislikes handing over money to the taxman.

In 1971, the budding businessman briefly landed in prison for doctoring the accounts of his record company. It proved time well spent for behind bars Mr Branson became aware of the supreme importance of navigating the boundaries of the permissible with tax avoidance schemes such as the use of multiple trust funds set up in exotic locales. Earlier this year it was discovered that Virgin Care, one of his many business ventures, handles well over £2 billion in monies for the National Health Service (NHS) but somehow manages to avoid paying a single penny in taxes. The company, registered in the British Virgin Islands, claimed not to have made a profit since it was founded in 2010. This is true. Accounts are set up in such a way as to not show a profit in the UK.

In 2013, Mr Branson became a tax exile and moved to the British Virgin Islands in order to deny Her Majesty’s Revenue and Customs well over £1 billion in taxes. He insisted that his move was merely inspired by the natural beauty of the Caribbean archipelago. Whilst he enjoys life on a private island, Mr Branson companies are seeking large government bailouts amounting to well over the billion pounds that he squirreled away surreptitiously. Small wonder that the high-flying, fast-moving Virgin-tycoon enjoys draping himself in the union jack as he scores yet another strike for British industry: as an ardent advocate of ‘socialism for the rich’, Mr Branson has fared exceptionally well cosying up to the state.

Though it is inevitable that some companies find it hard to embrace the spirit of the moment and let go of their old ways, the post-corona world may not look too kindly on their lack of commitment. The state, and the body politic it represents, are set for a major comeback. Most pundits agree that laissez faire, the unbridled supremacy of unfettered market forces, will take a severe hit once economies start to emerge from the lockdown. It will no longer be enough to make pledges for a gentler form of capitalism. Corporate social responsibility (CSR) is likely to take on more concrete forms.

The present pandemic-induced economic crisis is different from previous recessions that usually had been caused by major failings in one particular sector spreading to infect the entire market. No single economic actor bears blame for the pandemic which, in a sense, proves a great equaliser. With nearly the entire business community in the same proverbial boat, a vessel taking on water at an alarming rate, systemic-wide solutions offer the only hope for salvation.

CSR is set to take on additional meaning. For the second time in just over a decade, taxpayers assume the responsibilities of shareholders as losses are again being socialised. Expect shareholders to clamour for the privatisation of profits – their presumed inalienable right – once the business activity picks up. However, just as the scope of this crisis is unprecedented, the untold trillions of euros and dollars being disbursed by states and their central banks are not merely buying relief: they are buying a stake as well.

In their struggle for survival, few large companies realise this. Most chief execs seem to think this is just another bailout put in place to ensure the continuation of habitual business practices after the recession has ended.

Boeing CEO Dave Calhoun knows better and is reluctant to make use of the billions in federal aid money earmarked for his company. Mr Calhoun was one of the first to warn that acceptance of the bailout funds implies a loss of corporate independence. Though his troubled company can use the help, Mr Calhoun has vowed to look for loans elsewhere. Chief execs unable to ignore the helping hand of government must come to accept that the centre of gravity of their fiduciary responsibility is about to shift from shareholders to government. However, that need not be a cause for concern.

As the contours of the post-corona world order slowly emerge, it becomes clear that the vast sums of cash injected into distressed economies cannot be repaid anytime soon – or at least not in the traditional way.

Inflation may ultimately help rid balance sheets of burdensome liabilities. Central banks could also decide to monetise the problem. Some economists are already now suggesting that it might be worth dispelling the fictional notion that the trillions in credit issued will ever find their way back to the central banks. Instead, that credit could conceivably be funnelled via easy instalments to governments which may want to use the windfall to slowly rebalance their accounts in preparation for the next crisis. The bailout trillions are here to stay. The more important question involves determining the ultimate beneficiaries of the cash.


Raining on China’s Parade

Sensing a unique opportunity to take a shortcut to the global top spot, China is putting in a sustained effort to turn tragedy into triumph and expand its standing and reach in the wake of the pandemic. The Chinese government is pretty pleased with its handling of the corona outbreak and now seeks recognition as a medical superpower and, more importantly, affirmation that the country’s societal model is superior to that of even the most advanced liberal democracies. However, if President Xi Jinping thinks that his government now sits at the top of the world, he has – as the saying goes – another thing coming.

Given the absence of US leadership and the unedifying displays of disunity in Europe, the ambitions of President Jinping are quite understandable and not at all unreasonable. However impressive its track record in defeating poverty and disease, the Chinese government lacks the self-confidence and inner strength necessary to provide any form of global leadership.

A country that feels the need to cow those less powerful into submission, cannot take dissent without suffering a bout of existentialist angst, and promotes alt-truths in order to hide its own failings, is not one the world can trust.

Last Saturday, The Guardian reported that Beijing has clamped down on the academic establishment and is taking research papers offline that paint a slightly different picture from the one broadcast by officialdom. Preliminary studies published by the China University of Geosciences in Wuhan on the origins of the corona virus have been deleted from the institution’s website and from a number of peer-reviewed fora used by academics to compare notes and critically examine the findings of colleagues.

In their attempt to control the narrative and exploit the pandemic to further the country’s own myopic interests, the powers that be do not tolerate any dissent. Scientific fact cannot be allowed to undermine the efforts of the state to prove the efficiency of its system in dealing with the pandemic. Rather than a sign of strength, the People’s Republic authoritarian posturing underscores the rather fragile nature of its government which is apparently unable to accept even the slightest form of criticism and instinctively represses anything and anybody not toeing the official line as drawn by those who know better.

Not only has China vastly underreported the number of corona dead, the country also flooded the world with shoddily made, and therefore useless face masks, it now silences scientists as well. If the world wants an example of how not to deal with a pandemic, it just need look at China.

Whilst the US government was painfully slow off the mark thanks to a peculiar president with a penchant for grandstanding, Washington does not suppress scientific research, has not muzzled the media, and continues to act within the boundaries of democratically established law. This perhaps helps explain why most Americans are tolerant of President Trump’s daily shenanigans: the vast majority of people still have a degree of trust in the state. Personal and collective freedom need not be limited either as most individuals and businesses know what is expected of them and act accordingly.

This is even more evident in Europe where governments experience no trouble at all whilst steering their societies in the sensible direction. Prime ministers and presidents are taking their cue from scientists, explain decisions in great detail, and keep parliaments in the loop. The press provides both context and constructive criticism which are widely considered to be helpful and even essential to the smooth functioning of democratic society. In order to command obedience, western governments must first earn the trust of their people. Transparency and accountability are key in liberal democracies.

In The Netherlands, the first stop in the ongoing debate about the possible usefulness of tracking technology in the fight against the spread of the virus was the decision to allow people to opt out of it. The government immediately recognised that forcing the Dutch to install a monitoring app on their smartphone would only have provoked a great many into civil disobedience. The second stop involved a decision to allow users of any future tracking app full control over their personal data.

Another consideration is that the Orwellian monitoring of citizens in China has probably not contributed in meaningful ways towards the containment of the virus – or at least not to the extent claimed by the country’s government which has made the suppression of bad numbers into an art form, especially when ‘national honour’ is at stake.

Strong empirical evidence gathered in Hubei Province, ground zero of the pandemic, suggests that China has severely underreported its death toll. However, it is not known how much of the data was fudged or how deliberate authorities were in juggling the numbers. Admittedly, the nature of the infection makes it hard to produce exact figures. Now that independent fact finding and scientific investigation have been outlawed, the true scale of the epidemic in China may never come to light.

China’s barely disguised schadenfreude at the apparent inability of liberal democracies to deal with the pandemic effectively is not only unseemly, but also misplaced. Because the country was slow to admit to the seriousness of the outbreak, and actively suppressed reports from Wuhan, it misled the global community by creating a false sense of security. Though the corona outbreak may not quite be China’s ‘Chernobyl moment’, the country’s claim to the superiority of its illiberal system looks tenuous, if not downright preposterous, and is unlikely to outlive the pandemic.

On the economic front, China can expect strong headwinds as the previously unstoppable march of globalisation slows down or shifts into reverse gear. The pandemic has laid bare the fragility of global supply chains, the silliness of just-in-time manufacturing processes, and the dangers of offshoring production. Moreover, the governments now shovelling vast amounts of emergency cash into their economy will expect to see some kind of return.

In order to speed up the post-corona recovery, and rebuild the economic resilience lost to globalisation, European governments are beginning to look for ways to onshore production, not just of medical supplies but across the board. Cruder forms of protectionism will be avoided but shielding domestic markets from predators who take but rarely give, of which China regrettably constitutes the prime example, is likely to lead the agenda. Even before the pandemic took hold, Germany, France, and others were already questioning the wisdom of allowing Chinese competitors near-unfettered access to their markets and technology.

In a way, China must come to accept that it has matured as a nation and has joined the ranks of the developed world: it is no longer a poor country looking for a break as it busily lifts millions out of poverty. No longer can Beijing explain away its authoritarian demeanour by stressing the need for political stability as it seeks to accelerate development and create prosperity. Should the Chinese government really wish to assume a global leadership role, it must find the self-confidence and courage to set both the economy and the people free.


SDG Lab at UN Geneva: Delivering the 2030 Agenda in Decade of Action Will Call for Co-operation and Courage

In 2020, to mark its 75th anniversary, the United Nations have initiated UN75, the largest and most inclusive global conversation on how to build a better future.

The initiative intends to map out what works and what doesn’t within the framework of the 2030 Agenda for Sustainable Development. When calling for global participation in the conversation, UN Secretary-General António Guterres remarked that no country can solve the complex global challenges on its own. Participation is pivotal to shaping the future we want.

And 2020 will be a year of great importance: there are just 10 years left to achieve the 17 Sustainable Development Goals (SDGs) of the 2030 Agenda.

The goals, adopted by all countries in 2015, constitute a universal roadmap for the world and represent a shared commitment for people, planet and prosperity. Among its key aims, the 2030 Agenda includes bringing to life a low-carbon, climate-smart economy, ending extreme poverty and hunger, and promoting peace, just societies and gender equality. All of which must be accomplished within the next decade.

Doing so necessitates concrete action to be taken now to safeguard the progress made over the past five years.

To deliver on the 2030 Agenda, stakeholders, stretching across sectors, societies and countries, require greater mobilisation — a point made by UN Deputy Secretary-General, Amina J Mohammed, when briefing Member States on the Decade of Action in late 2019. She acknowledged that “game-changing transformation” has yet to occur. Gender inequality, the climate crisis, poverty and hunger, corruption and numerous other obstacles still haunt and hinder us.

Unpacking the Decade of Action

Under the umbrella of the Decade of Action, the UN has identified three action points: mobilisation, ambition and concrete solutions. Governments and other actors need to showcase good practices and address their failures.
These three action points resonate with the SDG Lab at UN Geneva, and strike at the chord of the Lab’s DNA. As a relative newcomer in the sustainable development space, the Lab acts by serving as a connector, an amplifier, a question-asker and an innovator.

The SDG Lab’s role

The SDG Lab leverages the convening power of the UN. It brings together governments, actors from the UN system, civil society, academia and the private sector, and offers a neutral space to advance the SDGs. The role of the Lab is increasingly relevant in disseminating SDG solutions.

Among the key initiatives that the Lab has spearheaded is its work in connecting the expertise and resources of the finance and development communities. Development finance is taking a new turn. More investors are looking to drive capital for impact, and to integrate social and environmental aspects into their investment processes. Both communities acknowledge that much more can be achieved together than separately.

New sustainable finance projects have been developed in the Geneva ecosystem. One such project is the “Pipeline Builder” that aims to bridge the need for investment at country level with actors who want to drive more capital for greater impact. Another concept that is being explored is an initiative that would facilitate SDG financing by strategically utilising public and philanthropic capital to incentivise the mobilisation of additional private finance.

Bridges for sustainable finance

In 2019, the SDG Lab, together with 50 partners, held Switzerland’s first-ever Building Bridges Week (buildingbridgesweek.ch). The event’s ambition was to help influential financial players gain exposure to sustainable development and insight into impactful investments.

The Week also tapped into the growing fatigue with the “business as usual” attitude. Many citizens have pressing demands for new investment models aligned with the 2030 Agenda. They want to see their money make a difference, as well as financial returns.

In the spirit of the Decade of Action, initiatives such as these help to mobilise the SDG actors of international Geneva and beyond, boost ambitions and provide SDG solutions.

In line with the momentum of UN75, the SDG Lab will continue to do its part to accelerate implementation of the goals.


Debt Relief Needed to Preserve 30 Years of Progress

A grand coalition of creditors is to provide debt relief to the world’s least developed countries. Earlier this week, the International Monetary Fund (IMF) took the lead and cancelled some $214 million in debt repayments owed by 25 of its most vulnerable member states. IMF Managing Director Kristalina Georgieva explained that countries qualifying for assistance under the $500 million Catastrophe Containment and Relief Trust (CCRT) may direct more of their scarce financial resources towards public healthcare and programmes aimed at lessening the impact of the pandemic.

The United Kingdom, Japan, and a few other donor countries last month pledged additional funds to the trust. The vehicle was set up in 2015 to provide emergency debt relief to low-income countries facing natural disasters or health crises. In extreme cases the trust may cancel a country’s entire stock of debt owed to the IMF.

During a video conference on Tuesday, G7 finance ministers and central bank governors promised to support the efforts of the IMF and World Bank to help reduce the debt burden of the world’s poorest countries as they deal with the consequences of the pandemic. The meeting was hosted by US Treasury Secretary Steven Mnuchin who agreed to provide a ‘time-bound’ suspension of debt repayments to countries eligible for World Bank concessional financing. The G7 will join a wider G20 initiative currently in the works to suspend up to $18 billion in debt repayments.

Multilateral lenders are concerned that thirty or more years of economic and social development may be lost as the group of least developed countries watches global demand for their exports evaporate whilst facing an escalation of pandemic-related expenditure. In a study citing research conducted by King’s College London and published just weeks before the pandemic hit, aid charity Oxfam warned that some 500 million people could slip back into poverty unless a major bailout is organised.

A disconcerting number of countries in Sub-Saharan Africa was already teetering on the brink of default after the commodities super cycle of the 2000s petered out and left them with heavy debt loads resulting from large infrastructure investments. In late March, Mrs Georgieva said that concerted action by all creditors, including commercial banks, is needed to avoid a full-blown debt crisis. The IMF estimates that up to $2.5 trillion is ultimately needed to help distressed developing countries meet their financial commitments.

Over the past few weeks, more than 80 member states have contacted the IMF to explore ways of obtaining assistance. Mrs Georgieva pointed out that many of them are dealing with a series of simultaneous setbacks as capital takes flight, commodity prices collapse, and domestic demand dries up.

However, efforts to lighten the debt burden for the poorest countries are hampered by past experience. Since the last write-off decided during the G8 (G7+1) conference of 2005, when some $40 billion was cancelled, the countries that benefitted most moved quickly to contract new debt.

The deluge of credit that followed the debt jubilee originated in China which deployed its financial muscle as a tool to broaden the country’s diplomatic footprint in Africa and elsewhere. China did so by partially displacing the World Bank as the preferred partner in large-scale infrastructure undertakings – a number of which promptly turned into white elephants.

Slightly less mindful of thorough planning, good governance and sound project management, the Chinese offered not only vast amounts of low- to no-doc credit, but also supplied the engineers, workers, and building materials. However, countries unable to meet their financial obligations to Beijing fell into debt traps and were subjected to humiliating penalties. In the absence of proper feasibility studies, many of the projects financed and built by the Chinese under the Belt and Road Initiative (BRI) became heavy millstones instead of roaring engines of development.

Sri Lanka offers a case in point. The country took an estimated $8 billion in Chinese credit, including $301 million at 6.3 percent annual interest for the construction of the Hambantota Port, touted as the ‘biggest harbour constructed in the 21st century’. The port underperformed from day one, as have most other large projects financed with Chinese credit. In 2017, The Sri Lanka government was forced to hand Hambantota Port to China in lieu of payment after the country ran into financial trouble over its high debt load.

Creditor nations are currently looking for ways to help emerging markets weather the pandemic’s economic fallout and financial consequences without indirectly funnelling funds to China. It doesn’t help that most, though by no means all, Sub-Saharan countries that now urgently need support, paid scant attention to improving governance during the almost 20 years that their economies boomed.

Though fatigue amongst donors is palpable, so is the recognition that a large-scale crisis in emerging and pioneer markets will lengthen to path of post-corona recovery for developed nations as well. The pandemic’s timing is particularly unfortunate. In a landmark study released late last year, the World Bank concluded that the latest surge in credit flowing to emerging market and developing economies was the ‘largest, fastest, and most broad-based’ in nearly five decades.

Global Waves of Debt compares four distinct periods of significant debt accumulation since 1970. The study found that in developing countries the ratio of all debt (government, corporate, and private) to GDP rose by 54 percentage points to 168 percent since 2010 when the debt build-up gathered speed. The analysis also states that about half of the 521 ‘national episodes of rapid debt growth’ studied resulted in financial crises that depressed per capita incomes and slowed investment. Even more disconcerting, the report noted that most governments have failed to invest in human capital even as credit was widely available.

Whilst the need for debt write-offs on a massive scale is recognised by most, the conditions attached to this in part self-serving largesse may yet cause heated debate, especially when attention turns to the plight of larger emerging market economies that have made a business model out of debt defaults such as Argentina.

The recipient of a controversial $56 billion bailout package put together in record time only months ago, the South American country has singularly failed to implement the full set of structural fiscal reforms promised. With inflation running at almost 50 percent and the economy set for a 3 percent contraction even before the pandemic struck, Argentina now seeks to leverage the crisis to renegotiate its national debt on a take-it-or-leave-it basis, insisting on an interest rate ceiling of 2 percent.

Though the IMF has called on private lenders to accept a ‘haircut’, most seem unwilling to do so and express annoyance at the Argentine government’s refusal to engage and communicate constructively. Bondholders also remember the precedent set by the so-called ‘vulture funds’ that for more than a decade refused to accept a haircut and were ultimately rewarded with generous terms, proving that stamina pays off.

However, this time stamina may only add an extra layer to the economic disaster in the making. Recriminations over the way the debt jubilee of 2005 was mishandled are likewise unhelpful. The global nature of the economic recession caused by the pandemic, requires a global response. As the IMF showed in its latest growth forecast, released earlier in the week: there are no winners in this recession. Even on a global scale, the corona virus acts as a great equaliser and no economy is more equal than others.


The Great Lockdown and Echoes from the Past

The brief and uneventful interlude that followed the Great Recession of 2007-13 has been supplanted by the Great Lockdown of 2020. The term was coined by Chief Economist Gita Gopinath of the International Monetary Fund (IMF) as she unveiled the global growth forecast for this year and the next. If there existed any doubt that the Great Lockdown was one for the history books, the numbers presented by Ms Gopinath ended that faint hope: in March, the global economy fell into a veritable black hole.

Even the darkest of doomsayers would not have dared predict such a sudden and near-total meltdown for fear of being branded a certified fool. Almost desperately looking for a silver lining, economists, analysts, businesspeople, and politicians have found none. The depth and girth of the Great Lockdown are such that visions of a Brave New World ready to emerge after the pandemic has abated almost instantly turn into expressions of delusion.

Though the Corona Crash is sudden, brutal, and unexpected, the period leading up to it has an ominous parallel in modern history, including an outcome that is rather unsettling. The order of events unfolding between 1918 and 1939 may have been different, but the ingredients were not: a pandemic, a market collapse, a shift in the global balance of power, and the rise of authoritarianism. With only a whiff of imagination, the Roaring Twenties of the last century may be reflected in the mindless celebration of hedonism that marked the years preceding the Great Lockdown.

In the latest edition of the IMF World Economic Outlook, global GDP is expected to shrink by 3.1 percent this year. In 2009, at the height of the financial crisis, the world’s economic output decreased by just 0.1 percent on average. In a blog post on the IMF website, Ms Gopinath notes that for the first time since the Great Depression both advanced and emerging economies are dipping into a recession simultaneously.

The IMF predicts per capita income levels to retreat in 170 countries. Advanced economies are hit hardest and can expect their GDP to lose an average of 6.1%. Emerging markets, excluding China, will shed 2.2 percent of their output. Amongst major economies, only China and India may be able to avoid shrinkage although any economic growth registered there in 2020 is expected to be anaemic.

The good news is that the crisis will be over by Christmas. According to the IMF forecast, next year should see the world economy bounce back vigorously. In 2021, global output may rise by as much as 5.8 percent, making up for most of the losses sustained during the pandemic. Growth in the advanced economies of Europe, North America, and the Far East will amount to 4.5 percent with Germany leading the pack (+5.2%). Emerging market economies can expect growth to average at 6.6 percent with China (+9.2%) in charge of the pulling. The rising tide will lift the rickety boats of low-income nations as well. The IMF forecasts 5.6 percent of economic growth in the least developed part of the world.

The picture painted in the IMF World Economic Outlook appears to offer plenty of reason for cautious optimism. The Great Lockdown seems to consist of a sharp and painful contraction followed by happy times. If the world manages to keep calm and carry on whilst the pandemic rages, a cornucopia of plenty will be its reward.

Hope - the last one to die as the Spanish saying goes - is the ultimate survival tool. Amidst all current uncertainty, there remains one unassailable fact: the Great Lockdown will not last forever. Just as day follows night, growth follows contraction. That knowledge is, however, of little use to people and businesses struggling to remain financially afloat whilst the recession does its worst.

In the US and the UK, commercial banks and government entities struggle to distribute the vast amounts of emergency cash earmarked for relief programmes. It is one thing for politicians to announce grand plans, but quite another for these to be implemented. Fully two weeks after Chancellor of the Exchequer Rishi Sunak threw the UK economy a £300+ billion lifeline, small- and medium-sized businesses have only been granted £1.1 billion in emergency loans. With few exceptions, commercial banks charged with getting the cash to where it is needed most have been dragging their feet, finding all sorts of reasons to reject applicants.

Though the UK government guarantees up to 80 percent of the loans, bankers are hesitant to take on their share of responsibility fearing that many of their business clients may not survive the pandemic in what then becomes a cruel self-fulfilling prophesy. In the US, the disbursement of emergency loans and grants has also hit numerous obstacles as evidenced by the seemingly unstoppable rise in the number of people who lost their job to the pandemic panic: 20 million and counting.

By removing any and all risk to banks, Germany has managed much better to shield its economy and preserve its businesses. Chancellor Angela Merkel and her economic team have displayed a remarkable agility in formulating and implementing a comprehensive and effective response to the crisis. Because of this, the country is well prepared to seize the moment once the virus has been contained. Germany and a few other Eurozone member states that balanced their fiscal accounts during the interlude between the Great Recession and the Great Lockdown are now able to limit the damage wrought by the pandemic and ensure a head start once economic activity starts to pick up.

As masters of their own currency, the UK and the US are able to do likewise and even better. The US in particular has already benefitted tremendously from its enviable position as keeper of the world’s reserve currency. In times of trouble, everyone buys into the US dollar, relegating upstarts such as the euro to, at most, a humble supporting role.

The US Federal Reserve was quick to establish 14 swap lines with overseas central banks to enable them to supply dollars to their strained domestic banking systems. The Fed also broke new ground by allowing countries to pledge Treasury bonds as collateral for dollar advances. This ensures that the global economy, and world trade, do not ground to a complete halt by a shortage of dollars. As such, the US Federal Reserve has been the unseen hero of the moment – and a reservoir of unequalled expertise in the management of the world’s financial affairs.

Critics of the pre-eminence of the US dollar, such as former Bank of England governor Mark Carney, argues that the rather unorganised state of fiscal affairs in the United States undermines the stability of the global financial system. Though Mr Carney’s arguments, and those of other critics, sounded pretty convincing at the time, they underestimated the curious fact that budget deficits and national debt are quite irrelevant when the culprit controls the only mint that matters.

Economic historian Adam Tooze of Columbia University agrees that the global financial system anchored on the US dollar is inherently unstable: “So is a bicycle, but if you’re a skilful rider, a bike is great. The Federal Reserve has demonstrated it’s a skilled rider of the dollar hegemony bike.”

Meanwhile, Europe’s attempt to undermine the dollar’s status as global reserve currency has been exposed for what it is: severely flawed and half-hearted. The Eurozone’s inability to agree on concerted action such as the pooling of debt and the mutualisation of risk, understandable though it is when watching events from a German or Dutch perch, keep the euro tied to its own continent. The euro’s moment has not arrived and is, perhaps, more distant than ever before. The common currency will undoubtedly survive the pandemic, albeit slightly tarnished and with less pretention.

Predicting the outcome of the Great Lockdown and the character of the post-corona world, remains fraught with danger. The IMF warns that the accuracy of its global outlook depends on the time it takes to contain the spread of the virus. Thus, any optimism must heed the lessons of history and pay attention to echoes from the past. ‘It will be over by Christmas’ is not a phrase that inspires confidence.


Lessons from China

[caption id="attachment_14951" align="alignright" width="300"] China: Shanghai[/caption]

For the first time in nearly half a century China’s economy has stopped growing. The National Bureau of Statistics (NBS) reported a 6.8 percent drop in economic output over the first quarter of the year. Retail sales were down by 19 percent and export sales shrank by 13 percent. Fixed asset investment is down as well whilst unemployment jumped to 5.9 percent.

Though NBS data usually require a pinch of salt, there is little doubt that the Chinese economy took a severe hit from the pandemic. However, in its World Economic Outlook, published earlier this week, the International Monetary Fund (IMF) predicts China to bounce back quickly and end the year on a positive note with GDP expanding by a modest 1.2 percent. IMF forecasters expect the country to get its mojo back into working order next year when the economy may grow by as much as 9.2 percent.

Though the IMF’s outlook is peppered with caveats, the fund clearly continues to view China as the main driver of global growth. As far as the IMF is concerned, a serious re-evaluation of globalisation is not in the cards. It is, of course, not the fund’s job to consider the political landscape as it analyses economic performance and distils trends from numbers. In fact, the IMF enjoys somewhat of a reputation when it comes to steamrolling over the concerns of politicians, reminding them that nations must, as a rule, live within their means.

Whilst the advice the institution dispenses is usually quite sound and sensible, the fund – by its own admittance – never before had to deal with a global recession of a magnitude comparable to the present crisis which struck with a speed and ferocity not seen before in living memory. The pandemic has materially changed political reality, resulting in a paradigm shift in our collective understanding of economic theory. The spread of a microscopically small virus has exposed the fragility of the very system that has generated considerable wealth.

Over the past 40 odd years, globalisation has lifted billions out of poverty in Asia, Africa, and elsewhere. By leveraging the comparative advantages of nations, as first codified by the British political economist David Ricardo at the start of the 19th century, the world entered an era of almost continued economic growth, interrupted only by relatively small hiccups as dynamic markets corrected distortions and eliminated pockets of inefficiency.

China’s economic contraction, however brief, may be dismissed as atypical since it was caused by an unexpected externality and not by some major flaw of the country’s development model. That model has yielded extraordinary results. In 1976, the year Chairman Mao passed away, the country boasted a per capita income of $167 – one of the world’s lowest. After the Cultural Revolution had been derailed with the arrest of the Gang of Four, China embraced the Four Modernisations first proposed in 1963 by Zhou Enlai, then vice-chairman of the Communist Party, and implemented by the great reformer Deng Xiaoping in 1977. What happened next constitutes a miracle of sorts. Fast forward 43 years, the blink of an eye in the course of human history, and China presides over the world’s second largest economy with a per capita income close to $10,000.

The almost mind-boggling progress of the country took everyone by surprise. It had been deemed impossible. In 1988, Milton Friedman, the dean of economic liberalism, proclaimed that China could not possibly hope to attain any significant measure of prosperity since it lacked the requisite political freedom that underpins capitalism. “To get rich, China must be free,” surmised the late professor of the University of Chicago who counted US President Ronald Reagan and UK Prime Minister Margaret Thatcher amongst his disciples.

In fact, Prof Friedman gave this advice to General Secretary of the Communist Party Zhao Ziyang whilst on a visit to Beijing at the invitation of Chinese top officials eager to discover the wonders of capitalism. However, Mr Ziyang did not at all like what he heard from the US professor. After he had left, China rewrote the textbook and chose its own path to riches – disassembling long-held theories about the crucial link between free markets and democracy as it rapidly emerged from poverty.

The pandemic currently holding economies hostage all over the world also forces a rewrite of the economic cookbook. As China has proved, that need not stall growth. In Europe, and even in the United States, the primacy of the market is being questioned. Thanks to a senator from Vermont, young Americans have discovered that unbridled capitalism is not the only choice of offer. As if an entire generation suffered an epiphany, interest in social democracy has been sparked. Though this may not lead to immediate demise of the mastodons of the political establishment, the epithet ‘card-carrying liberal’ no longer represents instant dismissal as a swivel-eyed loon belonging to a curious fringe movement.

In Europe, even staunch liberals such as Dutch Prime Minister Mark Rutte now seem to take pride in their social democratic roots. During a debate in parliament, Mr Rutte caused consternation amongst friends and foes alike by calling the country ‘socialist’ and considering that trait a blessing in these troubled times. Across the continent, political and economic thinkers quietly advocate for a return to wealth creation by all as opposed to wealth extraction by a few. The very premises of globalisation and the teachings of David Ricardo are being questioned as are the concepts of small government, deregulation, and privatisation.

Writing in The New York Times, former US Secretary of the Treasury Robert Rubin, who served in both Clinton administrations, now pleads for a massive and structural increase in federal spending. He argues that there is ample room for extra outlays of cash given that the federal budget represents only some 16 percent of GDP. That may easily be increased to 20 percent or more, he says. Mr Rubin also warns that any savings made now will prove to have been false later on. Allowing the US economy to languish in a long-tailed recession results in a lower GDP, taking a bite out of federal revenue, and pushing the debt-to-GDP ratio up considerably. Mr Rubin argues that it is wiser to put the horse in front of the cart and issue vast amounts of new debt to keep the economy going.

For all its uncertainties, the post-corona world will want to revisit previously discarded concepts such as economic resilience. Supply chains will be shortened as societies awake to the dangers of depending on distant others for their security. This is bad news for China and a few others with trade-based growth models such as Germany and The Netherlands. In the medium term, China will need to spur domestic demand which remained repressed to a significant degree whilst the country sought to exploit its comparative advantage as a low wage nation. In northern Europe too, wages and its corresponding domestic demand have been kept artificially low as part of a mix of policies to ensure relative competitiveness.

As the pandemic continues to ravage economies, and the direct and indirect costs of the outbreak mount, individuals and businesses alike will clamour for ever greater measures of support from the only entity able to provide the level of succour needed – the state. After the virus has been contained, that state will look, feel, and behave differently than before. It will also enjoy a much greater level of appreciation than before. That may either open a can of worms or lead to a more benign form of capitalism and a renewed interest in social democracy which, although much maligned, did manage to rebuild a continent shot to smithereens by a world war. Not only that, it did so at a clip comparable to China’s speeding down the road from rags to riches.


Dull but Sound: Ordoliberalism to the Rescue

[caption id="attachment_14956" align="alignright" width="300"] Hannover, Germany: Simulating of car manufacturing by robots, digital twin of the production on Siemens stand on Messe fair[/caption]

A hallmark of quality recognised the world over, ‘Made in Germany’ represents a welcome victory of content over hype. The German mindset and constitution, it would seem, are almost incapable of cutting corners to maximise short-term outcomes. As such, the country is an oddity in the industrialised world as its businesses mostly ignore the next quarter’s results, refuse to squeeze operational processes for instant profit, and keep focussed on delivering quality in the belief that the bottom line will follow.

Though the broad brushstrokes of generalisation usually hide a more nuanced and finely detailed reality, the differences between Germany and its economic partners and competitors are such that an exception may be justified. There is a reason why Germany does not and cannot produce a technological marvel such as the iPhone but can manufacture high-end cars.

Though Apple engineers in Cupertino do design a vastly superior product, the success of the company ultimately depends on the equally superior insights of its marketing department into the inner workings of the human mind. In a nutshell: it is hype that turns the iPhone into a coveted object commanding premium prices, just as it is engineering that drives a Mercedes to the pole position of consumer trust and desirability.

It is no coincidence that it was a Brit who coined Germany’s most ubiquitous post war slogan ‘Vorsprung durch Technik’. Sir John Hergarty, cofounder of the BBH (Bartle Bogle Hegarty) global advertising agency, remembers how he found inspiration on a faded poster during a visit to an Audi assembly plant in Ingolstadt. The phrase (‘Progress through Technology’) was dusted off and used to tie together the brand image of Audi. It not only became an instant classic in the advertising world, but also a source of pride for an entire nation. Nothing sums up Germany better than the catchphrase rescued from the crypt of industrial history by Sir John Hegarty.

Vorsprung durch Technik is also Germany’s ace in the hole for the post-corona world that will emerge sooner or later. Though the contours of that world are still barely visible, German industry is set to double down on its bet that global demand for hype is likely to decrease significantly as both individual and corporate survivors seek for meaning with an added sense of urgency and scepticism. The long reign of the ‘lean and mean’ crowd was cut short by the realisation that the corporate philosophy also included a ‘meagre and weak’ flipside.

During the pandemic, Germany’s fabled but often misunderstood ‘Mittelstand’ has just one major concern: the preservation of its workforce. The government has long been cognisant of the need to keep workers tied to their job. It helps out with a relatively simple yet widely available ‘Kurzarbeit’ support scheme that allows businesses to furlough workers during a downturn without shedding them from the payroll. Though many countries have tried to copy the original formula, and some are scrambling to do so now, most added a number of bureaucratic layers that undermined the scheme’s effectiveness.

Germany has used Kurzarbeit since the early 1900s to help workers and employers navigate the ups and down of the economy. The scheme is credited with helping the Mittelstand survive more or less intact through recessions, depressions, and periods of predatory business practices such as leveraged buyouts (‘Barbarians at the Gate’) and other destructive fads.

Though it lacks a clear definition, Germany’s Mittelstand may be defined as a collective of small- and mid-sized companies with up to €50 million in annual revenue and less than 500 employees. Slightly larger family-owned businesses are also generally understood to form part of this corporate constellation unique to Germany.

According to the Bundesverband mittelständische Wirtschaft (BVMW), the sector’s trade body, some 3.7 million companies, about 95 percent of the total, fall into the Mittelstand category. Together they employ nearly 60 percent of Germany’s workforce.

Most Mittelstand companies are virtually unknown to the wider public but some dominate a specific industrial niche and belong to a ‘hidden champions’ sub-category. Membership is reserved to companies deriving at least 40 percent of their sales from export and being the global number one, or runner-up, in their particular niche. Worldwide, the BVMW has identified around 2,700 hidden champions of which more than 1,300 may be found in Germany alone. These corporate gems form the true backbone of the German economy and support the country’s iconic industrial giants in their quest for global market share.

There is plenty of value to be extracted from Germany’s underreported addiction to ‘ordoliberalism’, a rather obscure form economic liberalism that gives the state a coordinating role in ensuring that markets operate near peak efficiency, regardless circumstance. Long eschewed by the much more fashionable - and flashy - Austrian School of economic thought prevalent in the English-speaking world, ordoliberalism may offer solutions to some of the quandaries facing policymakers as they try to trace a path through a post-pandemic landscape littered with broken companies and inhabited by traumatised people carrying a huge collective debt load.

The teachings of Friedrich Hayek and Carl Menger, and those of contemporary exponents of the Austrian School such as Alan Greenspan and James Buchanan, are of little practical use when a severe external shock has derailed markets to the degree that they no longer respond to either reason or stimulus. Arising, as it did, out of the smouldering embers of a world war, ordoliberalism offers a way to build up shattered economies without sacrificing individual or entrepreneurial freedom.

In essence, ordoliberalism argues that it takes three to tango: business, labour, and the state. Acting in unison, with only the state being more equal than the others, the three form the foundation of a social market economy. Though ordoliberalism features a few faintly corporatist elements, abhorrent to most advocates of the Anglo-American economic model, the approach does adhere to basic market principles, including a healthy degree of competition. Ordoliberalism aims to protect the market against its own tendency to create, if left unfettered, monopolies or oligopolies which can decrease and subvert the advantages offered by free competition.

This philosophy helps explain why the German economy is sustained by a backbone of many mid-sized corporates, small enough to remain nimble but large enough to rule over a niche. Historical parallels to the present moment abound and show, if anything, that after a major disaster everybody is an ordoliberal.

In the post war period, Adenauer and Eisenhower used the exact same interventionist recipes to rebuild and revamp the German and US economies. So did Clement Attlee in Great Britain and Charles de Gaulle in France. Even General Douglas MacArthur, as staunch a conservative as any, applied New Deal Economics to revive the war-shattered economy of Japan. China too seems to have taken more than a few pages out of the Freiburg School’s books on ordoliberalism, just leaving out the bits that mandate personal and economic freedom.

The difference is, of course, that most of the ordoliberals outside Germany quickly reverted to their own ways once the crisis had passed and the rebuilding was completed. That script will undoubtedly be replayed in the years ahead as the rubble left by the pandemic is cleared, debts are either settled or deflated, people have been put back to work, and businesses return to profit. With more experience than most in the application of ordoliberalism, and with its collective aversion to hype, Germany is well poised to limit the pandemic’s economic disruption, avoid lasting damage, and take the lead once the corona virus has been contained or defeated.