A stop sign, under which is written “corona-shutdown!”

GIS Dossier: Beyond the pandemic – the economics

  • Governments have intervened aggressively in markets
  • Central banks are pumping in tidal waves of liquidity
  • Supply chains have been severely disrupted
  • The result could be more ‘crony socialism’

GIS Dossiers aim to give our subscribers a quick overview of key topics, regions or conflicts based on a selection of our experts’ reports since 2011. This survey reviews our analysis of the economic effects of the Covid-19 crisis. An upcoming dossier will examine the political repercussions.

Six months into 2020, a singular event has already defined the year and altered the direction of geopolitics and the global economy: the outbreak of the Covid-19 pandemic.

Economically, the result has been devastating. Rules to slow the spread of the virus have forced businesses the world over to close and put millions of people out of work. The unemployment rate reached nearly 20 percent in the United States alone. The closing of borders has disrupted supply chains, meaning even many businesses that could continue to produce goods and services using safe practices were unable to do so for lack of supplies.

States and central banks have leaped into action, promising trillions of dollars’ worth of handouts

States and central banks have leaped into action, promising trillions of dollars’ worth of bailouts, handouts and new liquidity. Some governments have also taken the opportunity to strengthen their control over sections of the economy. New alliances are being formed that just months ago would have seemed unthinkable.

All of this will have long-lasting consequences, which GIS experts outline in our “Relevance beyond the crisis” series.

Interventionist dangers

As economies started tanking, governments’ first response, wrote GIS expert Dr. Emmanuel Martin, was aggressive intervention. Around the world, governments pledged to inject trillions of dollars into their economies, including through stimulus checks, and postponed tax and utility payments.

The magnitude of such spending raised questions about how countries would pay for it all. With tax revenues melting away, they will find themselves in a tight spot.

It is obvious that monetary policy will have to rescue fiscal policy. This means the crisis will greatly strengthen trends already present since the 2008 crisis or earlier: more interventionism, more bailouts, more direct and indirect government control. Monetary and fiscal policies might intermingle even more than they have in the past 12 years.

Dr. Martin saw two possible scenarios – one in which governments become “addicted” to monetary policy bailouts and infinite “fiscal quantitative easing,” and a second in which the public would demand reform and accountability from their leaders.

Cartoon by GIS
Governments were determined to pump economies full of aid, but they missed the point that their intervention was the main obstacle to growth (source: GIS)

GIS founder and chairman Prince Michael of Liechtenstein argued that business strategies are needed for the rough economic road ahead. He pointed out that “[t]he economy, especially its employment aspect and overall prosperity, is threatened,” adding, “[a]uthorities need to ease the corset of bureaucratic restrictions and reinforce the principles of a free market and trade.”

This crisis, he wrote, calls for governments to limit the provision of extra liquidity, so that only viable businesses receive it. He predicted that Europe could face a dire outcome, especially if states moved to punish well-run equity-financed businesses with confiscatory taxes. The service industry, though less dependent on the supply chains that have been disrupted by the crisis, were hit severely by the lockdowns. Firms that did not go out of business were unlikely to rebound quickly.

“Europe is likely to be slow because of the decline in individual purchasing power,” he predicted. “Since economies and citizens are already burdened with massive debts due to Keynesian monetary policies, the problem of weak consumer demand will be grave.”

In another piece, Prince Michael later argued that “crony socialism,” masquerading as capitalism, was at the root of the crisis unleashed by the anti-coronavirus measures. Since the 1980s, states had been running up colossal deficits, financed by banks, which could exempt the loans from equity requirements. This state of affairs “steadily undermined the economy and led to the financial crisis of 2008-2009,” leading to a point where the Covid-19 pandemic could bring the system crashing down.

It is obvious that monetary policy will have to rescue fiscal policy

To prevent that outcome, “additional trillions of dollars, euros and other currencies will be printed to allow the world of politics to stick to its unsustainable spending culture for a while longer,” wrote Prince Michael. “The economic and social consequences of this travesty could be disastrous.” He expected many calls for higher taxes, which would further dampen economic activity and innovation. “The only way to rescue our waning prosperity is through returning to a real market economy,” he concluded.

Supply-chain breakdown

One of the key economic effects of the measures imposed to contain the virus is the disruption of supply chains across the world. GIS expert Dr. Frank Umbach explored this issue, focusing specifically on the healthcare and energy sectors.

By mid-March, some 24 countries had prohibited the export of certain medical supplies, hoping to keep them for themselves in the worst-case scenario. As borders closed, it became clear that companies’ “just-in-time” global supply chains had exchanged efficiency for supply diversity and security, as well as redundancy.

By ignoring geopolitical risk management strategies, firms have not made their global supply chains flexible enough to substitute one supplier or component for another. It is now clear that the global health sector is too dependent on a handful of countries – China and India in particular – as major providers.

Interdependence of selected critical infrastructures
When one supply chain stops working, it can have knock-on effects throughout the entire economy (source: macpixxel for GIS)

The pandemic could have knock-on effects on the energy sector, Dr. Umbach warned. Interruptions to maintenance and potential staffing shortages could hinder the reliability of supply. In this context, nuclear power is a particular worry.

Previous energy-sector crises in Europe, and governments’ policy responses to them, hold some valuable lessons for the healthcare sector, he wrote. The European Union worked hard to diversify supplies and to base production of critical elements, like batteries, on the continent.

“[T]he EU will have to find new ways to maintain the benefits of globalization … while guaranteeing supply-chain security,” he explained. Doing so would not only include diversifying sources of supply, but also creating new storage capacity and rebuilding medical production in Europe.

Oil-price crash

The global oil market was particularly rocked by the sharp decline in economic activity. As GIS expert Dr. Carole Nakhle wrote, demand for oil fell to historic lows – and so did prices. The price for West Texas Intermediate (WTI) crude oil even briefly dropped into negative territory.

The crisis was so deep and unprecedented, that previous juggernauts, like the Organization of the Petroleum Exporting Countries (OPEC) became powerless to significantly alter market trends. “Today, oil market drivers are much bigger than the sector itself,” she explained. “There is no guarantee that any government action can deliver market stability. Powerful outside forces will likely dictate the markets’ shape throughout most of the year, perhaps even into 2021.”

Eventually, low oil prices will support the economic recovery

The low prices, however, were not uniformly disastrous, she said. Eventually, they would support the economic recovery, and could encourage governments presiding over oil-dependent economies to finally undertake important economic reforms.

Another unexpected result of the drop in prices was the unusual alliance it created between the U.S., Russia and Saudi Arabia. Just prior to the lockdown, Moscow and Riyadh had been engaged in a price war that threatened to shatter the fragile agreement they had come to several years before. The two oil-producing giants, along with the rest of OPEC and some other Russia-aligned oil producers (OPEC+) had been cooperating to restrain production and keep prices at a desirable level. In early 2020, both countries’ desire to throw off these limits had initiated a race to the bottom.

Oil market, largest producers’ shares
The U.S., Saudi Arabia and Russia – the world’s three largest oil producers – agreed in May to restrain production so as to stabilize prices (source: macpixxel for GIS)

The collapse of oil prices, however, forced them to think again. Encouraged by the U.S., whose tight-oil producers were also suffering, the two came back to the negotiating table. Washington, Moscow and Riyadh came to an understanding that they would again restrict output to keep prices stable. Yet these governments have very different goals. “Once the crisis is over,” wrote Dr. Nakhle, “it is difficult to see how the latter arrangement can survive, at least based on oil market-related arguments alone.”


In May 2020, GIS expert Professor Elisabeth Krecké examined “Coronomics,” a term which had come to embody the poorly thought-out economic strategies that many had begun to promote in the face of the crisis. What united these ideas, she wrote, “is the conviction that, within weeks, the coronavirus has plunged us into a world of radical uncertainty where none of the old rules make sense.”

Cartoon by GIS
The idea that the crisis had “changed the rules” of economics, and that policy needed to become more humane was dubbed “coronomics” (source: GIS)

Mostly, these plans called for a more “humane” approach to economics. “The Keynesian ‘free lunch’ is on the table again, along with the motto that exceptional situations require exceptional measures,” she explained. Along with the tidal wave of liquidity and aid, some economists are urging governments to act as “payers of last resort,” allowing hibernating businesses to stay alive until the worst of the health crisis is over. The potential consequences are dire.

Granted special prerogatives during the state of emergency, governments and ever-more-politicized central banks impose themselves as the dominant players in managing the coronavirus crisis. The burning question is: to what extent will massive state intervention in economic, social and private life go on once the pandemic is over? There is a risk that this state of exception will become a permanent paradigm of government.

At the country level

Several GIS experts pointed to the economic havoc coronavirus containment measures and their global fallout were causing in countries around the world. Oil-dependent economies – many of which were already in dire straits due to their overreliance on the fossil fuel – were particularly hard-hit. GIS expert Professor Joseph Tulchin explained how Venezuela now desperately needs humanitarian assistance. Covid-19, he wrote, had worsened the country’s crisis to an extent such that the entire region could be pulled in.

GIS expert Professor Stefan Hedlund wrote that economic turmoil could worsen the political unrest in Azerbaijan. The collapse in oil prices occurred just as the forecast was looking rosy for the country’s oil sector. However, a swift bounce-back in economic activity could leave Baku “bruised but not seriously damaged,” he predicted.

The drop in oil prices was beneficial for some countries, like India. GIS expert Pramit Pal Chaudhuri wrote that while the pandemic had ruined India’s plans for reviving the flagging economy, the significant drop in oil prices would at least give New Delhi the financial ammunition it needed to get back on a stable footing.

The Italian government thinks that the best way to cure the economy is to infect it with an older disease

The crisis hit European economies as well – deepening emergencies in some countries that were already in trouble, but also shaking the foundations of healthy economies.

Italy could see its ratio of debt to gross domestic product (GDP) rise to 160 percent, wrote GIS expert Dr. Alberto Mingardi. The government was also using promises of loans and bailouts as an opportunity to gain a greater stranglehold over companies and the economy in general. “The Italian economy is going to come under severe stress in the next few months: a Covid-19 patient with preexisting conditions,” he wrote. “Its doctor, the government, thinks that the best way of curing the country is to infect it with an older disease.”

Even Germany, with its relatively low debt and its budget surpluses, was not immune, wrote GIS expert Dr. Michael Wohlgemuth, explaining that the country’s fat years are over. Its positive fiscal indicators were based on years of high taxes, which may now need to end. “Germans shoulder one of the world’s highest burdens of taxes, fees and social insurance payments,” he wrote. “Lower corporate and income taxes could increase competitiveness, boost returns and spur private investment by German businesses.”

For its part, Japan stood to benefit as companies diversify their supply chains away from China, wrote GIS expert Urs Schoettli.

With China becoming less attractive for U.S. businesses, Japan could gain more attention in Washington. American companies will be looking for more opportunities in Japan, not necessarily in its domestic market, but in its technological prowess and its substantial innovative capacities.

Central banking

Central banks have played a crucial role in attempts to stave off economic depression. As the pandemic bit down in late March, GIS expert Professor Enrico Colombatto examined the choices facing central banks in China, the U.S. and the eurozone. For China, he saw two paths Beijing could take:

[T]he ruling party might indeed instruct the central bank to inject enough money to keep the 2020 rate of growth at about 5 percent. … However, it might also adopt a different strategy: pick its winners, stop the rise in inflation provoked by the widespread disruptions in supply chains and abandon many losers to their fate.

Though the first was more likely, the second would be better for the Chinese economy, he explained.

In the U.S., the Federal Reserve announced it would inject some $1.5 trillion into the economy, and that more would follow. With an election just months away, Professor Colombatto expected President Donald Trump to continue to pressure Fed Chair Jerome Powell to loosen monetary policy, and he expected Mr. Powell to oblige. To date, the Fed has expanded its balance sheet by about $2.9 trillion.

Current ECB President Christine Lagarde and former President Mario Draghi
Current ECB President Christine Lagarde and former President Mario Draghi disagreed sharply about how interventionist the bank should be – until Ms. Lagarde changed her mind under pressure from EU member states (source: dpa)

In Europe, new European Central Bank President Christine Lagarde originally declared that central banks should refrain from bailing out companies and governments. She added that the ECB planned no additional money printing. The statement “prompted vehement demands for policy change in the name of European solidarity,” wrote the GIS expert. “Yet the president was absolutely right, even though she changed her mind a week later.”

Former ECB President Mario Draghi was one of those who disagreed with Ms. Lagarde. In March, he broke a long silence to offer his prescription for how central banks should handle the crisis. As Professor Krecké wrote, he likened the economic downturn to a “war” that had to be fought with the most powerful tools governments and central banks had at hand.

Mr. Draghi wanted governments to borrow much more, and the ECB to pump even more liquidity into the eurozone economy. Professor Krecké warned that this was a dangerous cocktail that could lead to zombie companies (firms that have no chance of paying off their debts but have enough revenue to keep operating) and stagflation: lasting high inflation combined with high unemployment and stagnant demand.

Prospects for recovery

What then can be said about the outlook and potential for recovery? GIS expert Henrique Schneider examined the prospects in mid-April. He saw three possibilities. If the pandemic developed along the lines of severe acute respiratory syndrome (SARS) in 2003-2004, then the world could see a sharp, V-shaped recovery. If it developed similarly to the 1918 Spanish flu, then the world would see a prolonged economic recession. A second wave would make this pessimistic scenario more likely.

The third, most realistic option was somewhere in between those two, resulting in a U-shaped recovery. This scenario would mean the negative impact of Covid-19 would be stronger in Europe. North America, he said, has both the most upside and downside potential. “If the U.S. economic stimulus works and the countermeasures are lifted, North America can grow by about 1 to 2 percent. However, if Covid-19 spreads more quickly, affects more people and increases the mortality rate, a recession seems more probable, with a growth rate of -0.5 percent,” he wrote.

Cartoon by GIS
Governments may want businesses to stop outsourcing jobs and services to other countries, but the Covid-19 pandemic has only taught companies that diversifying their supply chains is the best way to avoid such risks in the future (source: GIS)

One certainty in the economic outlook is that globalization is not going away, despite many such predictions, explained Professor Colombatto in May. The pandemic did not convince companies to concentrate their supply chains closer to their end customers, as some thought it would. Instead, firms rightly came to the conclusion that they needed to diversify those supply chains across several countries, in case one or more closes due to another such disaster.

What will change, however, is the degree to which governments try to limit free enterprise. He wrote:

Governments will be tempted to take advantage of the emotional repercussions related to the pandemic and renew the rhetoric of national champions: the need to subsidize and possibly nationalize allegedly essential industries and types of production to contain the damage caused by weaker trade flows and dissolved supply chains.

In other words, the principle of free trade will be preserved, but its role will be weakened by scaring the public about the consequences of hypothetical disruptions.

Still, globalization will not go into reverse gear. In fact, it will deepen, and as competition intensifies, firms will flourish (and customers will benefit). The quality of governance will make a dramatic difference in which countries reap these advantages.

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