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From a pandemic to a global financial meltdown?

– Martin Sokol –

What will be the economic consequences of the pandemic? Are we heading for a wide-spread economic collapse? Is a global financial meltdown coming? In the current fast-evolving situation, it is difficult to predict how this will end. One thing is increasingly clear though: the hope that economic life will quickly return to normal once the health emergency has passed, is fading away. Will this unprecedented situation force us to rethink the ways in which our economic and financial systems are organised? My fear is that unless a fundamental paradigm shift is adopted, the coming crisis will further exacerbate social inequalities and deepen economic disparities at multiple geographical scales, while also failing to put us on a sustainable development path.

In terms of the immediate economic impact, it appears that we are entering unchartered waters. While an economic slowdown has been predicted, the speed and severity of the economic collapse in the leading economies have taken many by surprise. Worries grow that instead of a recession (technically defined as two consecutive quarters of falling output) we may be heading for a depression – a much more serious, longer-term crisis. Comparisons have already been drawn with the Great Depression of the 1930s. One of the most striking and visible aspects of this economic calamity is a dramatic increase in unemployment in all major economies.

The realisation that this crisis is threatening the entire economic edifice has been reflected in the policy responses seen so far. Indeed, the massive government spending in countries such as the US and UK is being matched by colossal interventions of their central banks. It is likely that, without such decisive actions, financial markets may have already collapsed – demonstrating just how central the central banks really are in sustaining contemporary financialised economies.

The economic response of the Eurozone to the pandemic threat did not get off to the best of starts. The EU’s economic response to Covid-19 thus for now basically mirrors the fragmented and uncoordinated response to the health emergency itself. Without ‘coronabonds’, each EU member state is left on its own devices when it comes to borrowing money to fight the pandemic’s economic fallout. Some countries hold first-class and other countries second-class rescue tickets – duly reflecting the uneven economic geography of Europe. This uneven geography is likely to be further exacerbated by the pandemic.

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