The world as we have known it for the past 40 years has come to a stop. We have a supply chain crisis, a demand crisis, a labour market crisis and an oil price crisis. The second crash that people were long predicting has arrived — but against the backdrop of the Covid-19 threat, it seems like a second-order story. The pound has already hit its lowest rate for decades, and more shocks may occur in the bond and currency markets. How long the disaster will last — or how much worse it will get — is anyone’s guess.
Thanks to the virus, events which earlier this year would have been scarcely conceivable have come to pass. A Conservative chancellor calmly pledged hundreds of billions of pounds to support working people — sums on a scale that would make even John McDonnell gulp. California is in lockdown, as is the Indian subcontinent. France, Italy and Spain are imposing the kind of confinement rules one might have expected during a medieval plague.
We are in the middle of a pandemic but not on a war footing — at least not yet. With time on our hands, whether in self-isolation or queuing outside Tesco, we might care to consider the question: how is our history being made? Will March 2020 be remembered like the Great Crash of 1929 or the end of the second world war in 1945, events which catalysed radical changes in the way economies and societies were organised across the world?
The Great Depression led to Roosevelt’s New Deal and the age of Big Government in America — a precondition, incidentally, for victory in the second world war. That war led to Clement Attlee’s modern welfare state, embodied by the National Health Service as Labour also nationalised huge sections of the economy. These changes endured until Margaret Thatcher and Ronald Reagan countered with liberalisation and deregulation, which laid the ground for globalisation, the free flow of goods, capital and services transcending national borders.
Globalisation integrated China and India into the world economy, lifting more than a billion people out of extreme poverty. Globalisation, of course, has always relied upon a particular mindset: the idea of ubiquitous choice, where the consumer can have it all, on demand, in real time. Friction-free trade and travel has meant abundant hi-tech, low-cost imports from China, and a beach holiday in Alicante rather than Skegness.
Covid-19 means that the age of ultra-mobility is over. Just as the 11 September terror attacks fundamentally changed our thinking about security, coronavirus will reinforce the tendency to control and monitor via the surveillance state. Health screening at airports may become routine. Borders will remain closed, especially if second or third waves of the virus appear. Companies will not abandon global supply chains, but the age of ‘cheapest is best’ is over.
In the acute phase of the crisis, we have seen national self-reliance trump mutual interest. When Italy asked for urgent medical supplies, no EU country responded. Germany initially banned the export of medical masks and other protective gear. France requisitioned all production of face masks. The European Commission was forced to step in, restricting medical equipment exports. This restored a semblance of EU solidarity, but at the expense of poor countries dependent on EU suppliers and at the risk of tit-for-tat trade restrictions.
Now the ‘Gang of Nine’ — including France, Spain and Italy — are pressing for ‘corona bonds’ to support their traumatised economies, in addition to the extraordinary liquidity measures from the European Central bank. Without Germany signing up, any proposal to mutualise debt is dead on arrival. Yet if Germany were to do so, it would almost certainly bring down the Merkel government. The coherence of the eurozone is once again at stake, with Italy the weakest link.
Emerging markets have been left dreadfully exposed. Brazil, Mexico and South Africa, among other developing countries, are under pressure from capital outflows as the dollar has strengthened, commodity exports fall in value and the easy money of the past decade takes flight. These countries will have to go cap-in-hand to the IMF for dollar liquidity or secure swap lines from the Fed.
Economic statesmanship demands a recognition of common interests and measures to spur a recovery. If the past is prologue, the US would take the lead. But Donald Trump’s ‘America first’ approach means that the USA, guardian of the post-war order, has become a predator, targeting allies and turning to protectionism. Trump, looking for re-election, has rejected the lessons in international cooperation learnt from the global financial crisis. He still regards Covid-19 as a Chinese implant.
China is manoeuvring to usurp America’s global leadership in the pandemic response, providing tons of material and medical assistance to many countries, including to the US. This is not an attempt to make history but to rewrite it, given that the original virus came from Wuhan and Beijing’s accounting remains open to criticism. China’s ‘mask diplomacy’ hardly demonstrates that Beijing is truly willing or capable of assuming the burdens and responsibility of co-managing the post-war system.
Dumping Trump in November might offer the US a chance to revive a multilateral approach, but even then, powerful forces still move the world away from globalisation. Consider the creeping Balkanisation of the internet. China has already asserted its suzerainty and censorship behind the Great Firewall of China. Russia’s Domain Name System would enable Moscow to restrict access to foreign websites and web services such as Facebook and Google. At the very least, Covid-19 will oblige governments to redefine what they consider to be ‘critical interests’ covering technology and other advanced products.
How might an advanced economy like Britain be affected? The answer changes by the week. If demand collapses further, the state will surely have to extend support for companies and workforces. Big companies will demand special treatment. They deserve support, but not if they continue to shell out dividends to shareholders. EasyJet, for example, paid £60 million to founder Stelios Haji-Ioannou and his family but says it has no current plans to seek state support.
Small and medium-sized enterprises are vulnerable, the gig economy even more so. And there’s a wider point about the value of labour. Covid-19 has redefined what a ‘key worker’ is and exposed the gap between their importance and their salaries. Many bankers have been filling their boots selling shares on behalf of clients. (Other bank staff, in fairness, are the essential agents for transmitting government policy such as mortgage payments to hard-pressed householders.) By contrast, health service workers were underpaid because there appeared to be an infinite supply of labour. Today, NHS staff are in desperate demand. How will they respond in the post-corona pay round?
As the battle against Covid-19 intensifies, there will be many losers. But there will also be one big winner: technology. The virus will not arrest the march of artificial intelligence. It may even accelerate it. Tech will be an indispensable weapon in the fight against future pandemics. Asian countries, having lived through the 2003 Sars epidemic, were far faster and more intrusive in their response. South Korea and Taiwan adopted rapid-fire testing with a flexibility and speed which would put the Europeans to shame.
In Singapore, which has admittedly a relatively small population of fewer than six million, the authorities have just launched TraceTogether, an app that uses Bluetooth to record distance between users and the duration of their encounters. People consent to give information to the health ministry, where it is encrypted and later deleted. Once the dust settles, the British must surely learn from Asia when building a better shield against the next pandemic. The trade-off between ceding privacy and adopting effective prevention might be one people wish to make.
Technology is not a one-way street to Orwellian dystopia. Technology will continue to empower the consumer. Virtual learning, video live-streaming and online delivery are all changing our approach to education, entertainment and food. Students charged £9,000 a year for university fees — suddenly informed they can do things just as well by watching videos at home for weeks on end — have already started to ask about value for money. (They were doing so beforehand, indeed, but nobody was listening.)
The new nationwide experiment in ‘remote learning’ is bound to open minds. And let’s also stop to think about what has just happened. If the best tuition is live-streamed from best-in-class grammar and state schools, as well as from private schools, is there any reason why it might not be made available to more willing students and teachers?
Much has been written about the rise of WFH (working from home). As my former Financial Times colleague Lucy Kellaway has often remarked, the rhythm and structure of an office are what make it special. The spirit of teamwork and common purpose are absent from a video conversation. On the other hand, working remotely for two or three months will stimulate organisations to rethink flexible working. WFH may turn out not to be a slacker’s paradise. If men do their bit at home, including on childcare, there could be more long-term opportunities for advancing women’s cause in the office.
In the short term, however, the casualties of Covid-19 will mount, not just in the hospitals but also in the market. The WeWork phenomenon — where trendy new companies could command eye-popping market valuations while losing money hand-over-fist in a search for growth — has passed. The liquidity party is over. Banks might not collapse this time, being well capitalised after 2008, but they remain hesitant about lending. A lot of businesses are going under or will fall victim to bigger, better-capitalised rivals, especially in the tech sector. As Warren Buffett said, when the tide goes out, that’s when you find out who’s wearing swimming trunks.
Covid-19 is indeed the Great Leveller. Conventional wisdoms have been shattered. But crises offer opportunities. Wise heads should be planning ahead. FDR, Churchill and, yes, Stalin lifted their sights in 1942-43 as the war against Nazi Germany began to turn. Prodded by gifted public servants like Keynes and others, these leaders thought about the future of Europe, the balance of power and the institutions of the post-war world.
We citizens, too, should think about our own roles and responsibilities, even as we agree that, for now, all that matters is survival.
Lionel Barber discusses the economic repercussions with Kate Andrews on The Edition podcast: