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When economic commentators say the COVID-19 pandemic is the most dangerous policy challenge since the 2008-2009 global financial crisis (GFC), they are surely right. The two crises differ in their causes and scope. But what clearly links them is the need for a large, early, and coordinated international response.
The GFC was driven by economic and financial imbalances that had been allowed to fester in major economies and by associated policy failures. COVID-19 is an “exogenous shock.” It is first and foremost a health crisis that puts human lives and physical well-being directly at risk. Further, in its economic effects, the pandemic is more complex than the GFC because it hits both the supply (production and distribution of goods and services) and demand (consumption) sides of the economy at the same time. Until there is confidence that the health crisis is being effectively tackled, economic uncertainties and their corrosive effects will not be dispelled.
Just as it was in 2008-2009, international coordination will be critical to resolving the crisis. The Group of 7 (G7) Leaders’ teleconference on March 16 to discuss cooperation to overcome COVID-19 was a useful first step. But the G7 statement was light on specific commitments and included no dollar numbers. And a group of just seven advanced economies is no longer sufficient to solve a global crisis such as COVID-19.
In 2008-2009, leaders of all the world’s major economies stepped up and played a major role in helping overcome the GFC. On the initiative of the George W. Bush administration, the existing Group of 20 (G20) finance ministers process was elevated to leaders’ level and a first G20 summit held in Washington in November 2008. The G20 importantly includes China, India, and other large emerging markets that play an increasingly central role in managing the global economy.
There is much the G20 can do to address both the health and economic dimensions of the current pandemic. But the prospects for cooperation today are mixed at best.
Since 2017, G20 Health Ministers have met annually, focusing on universal health coverage and health risk and security, including cooperation on pandemics. This process is nowhere near as deep as on the economic and finance side. It needs to be strengthened. COVID-19 should force an immediate acceleration.
The G20’s response to the GFC focused heavily on fiscal, monetary, and financial stability and trade policies, as well as support for emerging markets and low-income countries. While the circumstances facing G20 members today are quite different than during the GFC, the G20 still can and should help offer an organizing framework for the international response on the worrisome economic and financial forces the crisis has unleashed.
On fiscal policy, the major economies simply need to step up. Washington now appears to be moving toward a substantial initial package, which is focused on practical steps such as paid sick leave and food stamps. It appears further and deeper fiscal support is also in the offing. European countries are also moving. Italy is increasing its spending, France has effectively promised to spend as much as 12 percent of GDP to prevent the economy freezing up, and Germany has guaranteed all lending to small- and medium-size businesses. But even more is needed.
In April 2009, the G20 committed to a $5 trillion stimulus to raise output by 4 percent. That effort was assisted by the intellectual energy of the International Monetary Fund (IMF). During the GFC, the IMF and World Bank stepped up with a commitment of over $1 trillion in finance for emerging markets and low-income countries. The IMF and World Bank will need to work closely with their membership, in particular to assess the impact from COVID-19 to sustainability and external financing. Stepped-up IMF surveillance and program engagement, including augmenting existing programs, may prove essential, while the World Bank and regional development banks should increase support for the health response in poorer countries should they need it. The IMF has already announced it will make available up to $50 billion in rapid disbursing emergency finance. The IMF should consider liberally augmenting access to its rapid financing for a one-year period. The G20 should exhort the IMF and World Bank to remain vigilant; more support may be needed.
To date, global central banks have been doing a far better job than fiscal authorities in responding to the pandemic. In the GFC, global central banks cut rates quickly and at times in a coordinated action. The Fed has already cut key rates toward zero. It has also acted aggressively and preemptively to help preserve the liquidity of U.S. credit—notably commercial paper—and global funding markets. It may need to take further action, even resuscitating more of its GFC alphabet soup of lending facilities and emerging market swap lines.
Other major monetary authorities such as the European Central Bank (ECB) and Bank of Japan are more constrained. They are already close to or at the effective zero lower bound. They will thus need to consider more differentiated strategies than pursued during the GFC and will undoubtedly need to dust off their thinking on forward guidance, asset purchases, and targeted liquidity facilities and support. The G20, IMF, and Basel are important venues for such thinking.
Financial stability concerns were the hallmark of the GFC. In its aftermath, financial authorities acted quickly, among other things to strengthen bank capital and liquidity, while reducing leverage. With COVID-19, firms and households are likely to face temporary losses of income and an inability to repay loans. The U.S. federal regulators have already urged U.S. financial institutions to work constructively with borrowers and customers, underscoring that prudent efforts would not be subject to supervisory sanction. The ECB has acted similarly. Major central banks will need to ensure these welcome efforts are firmly implemented.
Coordinated action on trade was also a critical part of the 2008-2009 response. G20 countries made an important commitment not to slide into 1930s-like protectionism. While always honored in the breach, that commitment has been severely eroded over the past three years because of the Trump administration’s resort to broad tariffs inconsistent with World Trade Organization (WTO) rules. Rather than hoarding essential medical supplies through export restraints, as some are doing now, G20 economies should commit to lowering tariffs and other barriers to cross-border flow of medical goods and work together on a vaccine and treatments for the virus.
Unfortunately, the prospects for GFC-like cooperation in the current crisis are not favorable. The Trump administration is hostile to multilateral cooperation and has shown a reluctant preference to deal with the G7 rather than the G20. Global cooperation requires that the United States and China find ways to work together; that hardly appears feasible given current strains and finger pointing. Saudi Arabia holds the G20 presidency this year, but given its internal politics and the oil price war underway, it does not appear able or willing to provide a leadership role.
Global economic governance still matters, especially in a time of crisis. The G20 was set up as a global “fire station” to deal with spreading conflagrations such as COVID-19. There is a clear G20 agenda to advance global cooperation in the face of the pandemic and help overcome the crisis more quickly. Alas, it does not appear that the United States and G20 are ready to bring out the fire trucks. Hopefully circumstances will force their hand.
Matthew P. Goodman is senior vice president and runs the economics program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Mark Sobel is U.S. chair of the Official Monetary and Financial Institutions Forum (OMFIF) and senior adviser to CSIS. Both worked on G20 issues in the George W. Bush and Obama administrations.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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