The Financial Express

How Covid-19 pandemic broke the system

How Covid-19 pandemic broke the system

With breathtaking speed, the coronavirus crisis sends shockwaves around the globe. Production lines have come to a standstill. Global supply chains are broken. Companies are filing for bankruptcy. Workers are laid off. Millions lose their livelihoods.

Some countries have quickly launched measures to cushion the impending recessions. Whether these are sufficient to stop the economic downturn depends on how long the pandemic will last, and how deeply the crisis eats through the system. In the United State and China, many companies, banks, and households are deeply indebted. The economic collapse in Italy and Spain threatens to revive the euro crisis. The shockwaves of the Covid-19 pandemic are threatening to bring down these houses of cards.

Central banks are stepping in to stave off another financial crisis. The crucial question, however, is whether the coronavirus crisis can be overcome with monetary policy instruments at all. That very much depends on the nature of the crisis.

This is because the crisis is by no means limited to the economic sphere. The ability of states to protect the life and limb of their own citizens, is also being put to the test - and the stakes are nothing less than the fundamental legitimacy of the Leviathan.

What is at stake is the legitimacy of the strongmen, whose claim to power is based on the central promise 'I protect you'. Chinese President Xi Jinping has understood this and, accordingly, is taking drastic measures against the spread of the virus regardless of the costs. However, his counterparts in Thailand, the Philippines and Brazil have treated control of the disease lightly and are now being lashed out at by their own supporters. The question of whether, in the eyes of his voters, Donald Trump lives up to his central promise to protect America from external threats is likely to have a decisive impact on the outcome of the American elections.

While the coronavirus crisis may be disenchanting populists in government, it could be just what their counterparts in opposition have been waiting for. In the eyes of many citizens, Western democracies already lost control in the financial crisis in 2008 and the refugee crisis in 2015. Decades of austerity policies have weakened state structures; people worry whether their hollowed out health care systems will still be able to cope with the pandemic. In many countries, the public mood is turning against the free movement of money, goods, and people.

Many Europeans already fear to be among the losers of globalisation and automation. On top, they now have to cope with lockdowns, economic hardship and yet another refugee crisis. Right-wing populists certainly know how to mix the ingredients of 'open borders, dangerous foreigners, corrupt elites, and defenceless states' into a toxic brew. Make no mistake, liberal democracies are under scrutiny. In the midst of a right-wing populist revolt, democrats must now prove that they can and will protect the lives of all citizens.

Facing an existential threat, people tend to rally around the flag. This can justify draconian emergency measures, and even the permanent rollback of democracy. On the other hand, a crisis can also be the finest hour of competent, empathetic and hands-on governance. Good crisis management can rekindle trust in the democratic state.

Suddenly everything is happening very quickly. Global air travel is grounded. Borders are closed. Unimaginable large sums are being pumped into the markets. Spain nationalised its health care system. German politicians ponder the nationalisation of companies. The French President vows to reverse the subordination of social life to the dictates of the market.

Of course, all of these measures are due to the state of emergency. However, citizens will remember them when they soon again are told 'There is no alternative.' After decades of neoliberal state scepticism, the crisis suddenly revealed that nation states still have enormous creative power, if only they are willing to use it. The age of neoliberalism is finally coming to an end.

This sudden shift has been enabled by underlying geopolitical trends. For some time now, there is a bipartisan consensus in Washington to decouple the American from the Chinese economy so as not to strengthen the competitor for global supremacy. Globally positioned companies now need to re-assemble their supply chains overnight. Will all of these corporations return to China when the immediate crisis is over? The coronavirus crisis could then accelerate a development that has been going on for some time: deglobalisation. As a result, the global division of labour could disintegrate into competing economic blocs. Where will this leave developing countries who are struggling to climb up the global value chains? Has their moment for catch-up industrialisation passed?

The global crisis has raised awareness of how vulnerable hyperglobalisation has made us. In a globally networked world, pandemics can and do spread across borders at high speed. Global supply chains are all too easily cut. The financial markets are vulnerable. Right-wing populists want to close the borders and isolate themselves from the world - but that is the wrong answer to the global challenges. Rather, our goal should be to address the root causes of these crises. To do this, the global economy must be placed on a more resilient foundation.

The global financial system, which is held together by not more than duct tape, urgently needs re-ordering. For over a decade, central banks have not been able to counter deflationary trends through monetary policies. In the crisis, governments with expansionary fiscal policies are jumping aside. Politically, this means a return to the founding logic of parliamentarianism, the principle of 'No taxation without representation'. In other words, the financial systems must be put back under democratic control.

An international pandemic cries out for a coordinated global response. So far, however, each nation has pursued a solo effort. The answer to global challenges, however, must not be isolation and national selfishness, but rather solidarity and international cooperation.

Over the next weeks, the groundwork of the new world order will be laid. As opposed to 2008, progressives cannot afford again to lose the battle over interpreting what is happening, and what needs to be done. We must make sure we will shape the debates over how it will look like.  

Marc Saxer heads the Asia department of the Friedrich-Ebert-Stiftung (FES). Previously he worked in the FES regional office in India and Thailand and he coordinated the project Economy of Tomorrow in Asia.


[The Friedrich Ebert Foundation (German: Friedrich-Ebert-Stiftung; Abbreviation: FES) is a German political foundation associated with the Social Democratic Party of Germany (SPD), yet independent of it. Established in 1925 as the political legacy of Friedrich Ebert, Germany's first democratically elected President, it is the largest and oldest of the German party-associated foundations. It is headquartered in Bonn and Berlin, and has offices and projects in over 100 countries. It is Germany's oldest organisation to promote democracy, political education, and promote students of outstanding intellectual abilities and personality. - Wikipedia]

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