2021 - PRELIMINARY DRAFT REPORT - THE GLOBAL ECONOMIC CRISIS: IMPLICATIONS AND PROSPECTS

Faik ÖZTRAK (Turkey)

08 April 2021

The longer-term consequences of the COVID-19 pandemic for the global economy are not yet fully apparent. National responses to the virus have differed as have the economic consequences. Public responses in many countries have reflected lessons learned from the global financial crisis in 2009. This time, governments have far more swiftly introduced stimulus programmes to counter recession. The European Union, for instance, facilitated joint debt issuance and created conditions for a powerful fiscal response to the crisis. The United States acted with very large spending packages to sustain demand and maintain income. While preventing mass unemployment and bankruptcies, massive government spending will invariably generate extraordinary levels of public debt. There are concerns that this could eventually trigger inflation, although inflation and interest rates so far have remained remarkably low. It is not yet clear how this mass of debt will ultimately be financed. This will remain a compelling challenge for hard-pressed governments over the medium and long-term. 

There is an element of systemic competition underlying the current crisis, and this competition has an important strategic dimension. Several authoritarian actors have instrumentalised the pandemic in order to discredit democratic governance. China, for example, has incorporated the fight against COVID-19 into a broader national narrative of its “peaceful rise” and systemic superiority. It has sought diplomatic and public relations leverage from its contributions to the global fight against COVID-19. Countries that managed to contain the disease have also managed to keep their economies more or less functioning, and this has had international consequences. The capacity to quickly vaccinate populations and to help other countries vaccinate has become a kind of diplomatic currency. Certain countries have discounted the virus altogether only to discover that  the disease does not follow political dictates.

The world appears slated to return to growth in 2021, but there several potential downside risks  that might lead the global economy to underperform. These include ongoing bottlenecks to vaccination production and distribution, the emergence of drug resistant strains of the COVID 19 virus and renewed infection surges, the premature abandonment of government-led countercyclical fiscal and monetary measures with a resulting fall in liquidity, and a global retreat into hyper-nationalist economic and public health policies that would be fated to fail. Debt defaults could precipitate a financial market panic, which could spread rapidly given the huge debt burdens governments have assumed. Slowing economies have led to a shrinking tax base which has only exacerbated the problem. On the upside, a rapid ramping up of vaccination schedules could hasten the onset of so-called herd immunity, rapidly restore investor and consumer confidence, unleash pent-up demand, and thereby hasten a demand-led recovery. The persistence of low interest rates and low inflation could lengthen the period in which governments are positioned to provide essential monetary and fiscal support to national economies as the green shoots of recovery take root.

The draft report will be discussed by the Economics and Security Committee (ESC) at the Spring Session of the NATO Parliamentary Assembly.


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