Faik ÖZTRAK (Turkey)
09 September 2021
The longer-term consequences of the COVID-19 pandemic for the global economy are coming into focus. The pandemic is now recognised as having constituted the largest synchronised fall in global GDP in modern history, although its impact was quickly mitigated by governments which were guided by lessons learned from the global financial crisis in 2009. This time, governments have far more swiftly introduced stimulus programmes to counter recessionary forces. 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 and employment. Massive government spending, however, has generated extraordinary levels of public debt. There are concerns that this could eventually trigger inflation. Prices have indeed begun to rise and interest rates may eventually follow—a trend that would have important negative consequences particularly for highly leveraged developing countries. Moreover, 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 longer-term.
There is clearly an element of systemic competition that has emerged during the current crisis, and this competition has an important strategic dimension. Several authoritarian actors have instrumentalised the pandemic partly 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 kept their economies more or less functioning, and this has invariably conferred a degree of strategic advantage. Meanwhile, the capacity to vaccinate populations quickly and to help other countries vaccinate has become a kind of diplomatic currency. Those leaders who have discounted the virus altogether have invariably learned that the disease does not follow political diktats.
The world appears slated to return to growth in 2021 albeit on a lower trajectory than was envisioned before the crisis. But there are several potential downside risks that might lead the global economy to underperform. These include: ongoing bottlenecks to global vaccination production and distribution, public anti-vaccination sentiments, the emergence of drug resistant strains of the COVID-19 virus and renewed infection surges. Debt defaults precipitated by rising interest rates could precipitate a financial market panic, which could spread rapidly given the huge debt burdens governments have assumed. Economies impaired by the recession have had to cope with shrinking tax bases and new borrowing requirements. On the upside, a 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. But developing countries require access to vaccines or this optimistic outlook will be undermined. 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. But there are now signs that a benign period of low interest borrowing may end sooner than was initially hoped.
This draft report will be presented and discussed by the Economics and Security Committee for adoption at the Annual Session of the NATO Parliamentary Assembly.