Global economic co-ordination lacking in virus crisis

FRANKFURT — With the global economy melting down after the failure of Lehman Brothers in 2008, world leaders swiftly created an international forum that committed to boost economies by spending more and keeping trade open. Central banks announced rate cuts within seconds of each other.

The approach to the economic shock from the coronavirus outbreak is, so far, looking very different. The disease for most people causes only mild or moderate symptoms. For some, it can cause more severe illness.

With the world economy teetering, plenty of action is being taken — but often without co-ordination or consultation that could increase its impact. U.S. President Donald Trump banned flights from Europe, surprising outraged allies and causing markets to collapse. Plans for fiscal stimulus have popped up separately and incrementally in Italy and Germany as U.S. Congress debates aid measures.

The Federal Reserve, Bank of England, and European Central Bank poured in more stimulus —announced separately, the Fed on March 3, the Bank of England on Wednesday and the ECB on Thursday.

On Monday, leaders of the Group of Seven rich democracies — the U.S., France, Italy, Britain, Canada, Japan and Germany — are to talk by phone, according to a tweet from French President Emmanuel Macron. What action or commitments result from that remains to be seen. Investors in financial markets brushed off an earlier G-7 statement by finance officials. Since then, major indexes have fallen by the most since the market crash of 1987 and remain unusually volatile.

It is a sharp contrast with the co-ordination shown during the global financial crisis, when the Fed, ECB, Bank of England, Bank of Canada and others announced a half-percentage point rate cut simultaneously on Oct. 8, 2008, as stock markets plunged.

The current piecemeal approach does not sit well with former policymakers who dealt with previous crises, including ex-ECB chief Jean-Claude Trichet.

He told the BBC this week that it “is absolutely appalling that the U.S. took a decision to stop people coming in without any warning or any discussion with the Europeans. I think that it is without precedent and it is an illustration of the drama where we are.”

“We need a global response. We need the market to understand that there is some kind of global co-ordination.”

Alistair Darling, former U.K. finance minister, said that “one of the reasons that the global economy recovered 10 years ago was because of international co-operation. We all did the same thing – from Communist China to Republican-led United States. International co-operation at the moment is in something of short supply.”

The world economy is increasingly looking like it will fall into recession, with Europe and Japan almost certain to see a big economic contraction the first half of this year. The U.S. is facing a steep slowdown and China’s growth is forecast as low as 1% at the start of the year, the weakest in decades, from 6% previously.

Tristen Naylor, a fellow in international relations at the London School of Economics and deputy director of the G-20 Research Group, said global leaders are missing the chance to use the G-20 as an instrument designed to help deal with global crises.

“There hasn’t been any sort of push for global co-ordination on this, despite the G-20 having been set up for a decade ostensibly with this very purpose, of being positioned to deal with a global crisis,” he said.

During the global financial crisis “the speed with which they came together is wholeheartedly different from what is happening now, and I think that tells us something about the state of global governance.” It’s not just Trump and his America First approach, he said, but part of a broad trend toward national approaches.

To compare the speed between then and now, the World Health Organization declared a global health emergency on Jan. 30, six weeks ago, and the Dow Jones began its plunge Feb. 24, three weeks ago.

In 2008, Lehman went bankrupt on Sept. 15, deepening a crisis that was already under way. Three weeks later, on Oct. 7, then-President George W. Bush and British Prime Minister Gordon Brown were talking about convening 20 leaders representing most of the global economy. The day after, major central banks cut interest rates.

The heads of state and government of the Group of 20 met Nov. 14-15 and twice after that; a year later they were were confident enough to say that an economic recovery was under way.

Lack of co-ordination doesn’t mean nothing is being done. But it means that the measures may lose some of their impact.

Barry Eichengreen, an economist and historian at the University of California, Berkeley, wrote in Worth magazine “that the Fed’s failure to co-ordinate its rate cut with other major central banks sent a negative signal about the coherence of the response.”

He described the latest G-7 finance officials statement vowing use of “all appropriate policy tools” as “a nothingburger.”

It remains the case that monetary and fiscal policy may have limited effect against a medical crisis, since they cannot re-open businesses closed to prevent the virus’ spread. But, Eichengreen noted, co-ordinated government support for the economy has a stronger effect since some spending “leaks” to foreign imports. Doing it together means all sides are boosted together.

“In an ideal world, policy makers would maximise the confidence impact and efficacy of their measures by announcing all of them fast and jointly,” said Holger Schmieding, chief economist at Berenberg private bank. “Alas, we will never live in an ideal world. The responses will continue to come out in a piecemeal fashion.”

“However, that should not obscure the fact that the various initiatives add up to an unprecedented and unusually fast response around major parts of the globe.”

Admittedly, the economic policy response is still taking shape. The G-20 finance ministers and central bankers will have a chance to take up the crisis at three meetings this year ahead of the leaders’ summit in November in Riyadh, Saudi Arabia. So far, however, leaders may be working along the same lines, but not in unison.

Naylor from the London School of Economics said: “We haven’t seen a single sitting head of state or government say: ‘We have an instrument to co-ordinate this response, let’s use it.’ And that is significant. That is striking.”

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