Nicholas Trickett discusses the lack of global economic coordination in response to Covid-19.
Historical comparisons and allusions are comforting when sifting through what is to be done in response to the coronavirus shock. Echoing an increasingly common line, Labour MP and former Shadow Chancellor John McDonnell took a swipe at Rishi Sunak’s latest proposals on Twitter, arguing that an acceptance of mass layoffs “is archaic economics when a Marshall style plan is needed from a government to aim for a full employment economy.” Regardless of the economic orthodoxy or heterodoxy you subscribe to, borrowing costs are at historic lows and it’s cheaper than ever to publicly finance a massive spending plan to save jobs and demand for goods and services amidst ongoing surges of infection rates. Citing to the Marshall Plan, however, belies the nature of the economic challenge now facing the UK – and a curious lack absence of international awareness in plotting a way out of this seemingly endless disaster.
The Marshall Plan is instructive not as a guide for the scale or nature of mobilizing resources – no matter what politicians may dream, this is not the world of total war societies – but rather that the economic solutions to get back to recovery are international in nature. McDonnell and others invoking wartime would do well to rediscover that. The Plan would have failed had it not been embedded into a series of international institutional commitments and arrangements generally led by the United States, including the slow liberalization of trade, the management of exchange rates, and conscious efforts undertaken by Anglo-American companies and Western governments to stabilize the price of oil in the wake of the Second World War since at the time, oil prices had a huge impact on price inflation for goods.
It helps to think of the global economy as a series of interconnected balance sheets. One country’s trade surplus is another country’s deficit. One country’s trade deficit is, by definition, matched by a surplus of capital financing what it consumes beyond what it produces. These surpluses and deficits have to balance each other out to finally yield the entire aggregate size and shape of the global economy. These relationships interact every time any given national government adopts a spending plan to stave off job losses from COVID or to stimulate economic growth. Different economies have different structures depending on whether or not they’re a net exporter or importer, what they export and import, the size of their financial markets, and more. If you picture the economy as a composite of these factors stitched together into an admittedly ugly mosaic, what you quickly see is that pieces of every pound spent from the public purse flow many places: abroad, into domestic and international financial assets, into your own pocket, onto the balance sheets of British companies and foreign banks, and elsewhere. It all depends on how the money is spent, who receives it, what the terms of receiving it are, and most importantly where demand for different goods and services is located. Building back better doesn’t happen in isolation. No recovery is an island.
But if you look at the collective responses to the virus by country and region, there is very little effective coordination taking place. That’s terrible. For the last 20 years, exports of goods and services have accounted for anywhere from about 23% to nearly 31% of national GDP, largely fluctuating in response to the value of the GB pound and imports account for slightly more largely depending on the value of the Euro – the figure was 32.7% last year. Any kind of support scheme, whether provided as direct cash payments, wage subsidies, furlough extensions, loans with low or zero interest rates, and more sustain demand in the UK. That helps imports by providing you, in some way one hopes, the means to keep spending enough to get by. But those schemes, while helping keep companies afloat and people spending, cannot by themselves create demand for exports. The EU’s still struggling to turn political goodwill to create a joint recovery fund into concrete action, and even the joint plan as is worth just 2.25% of the European Union’s 2019 GDP, but spread out from 2021-2027. Less than half of it is actually direct spending for the crisis, with the rest being allocated over the longer term via shared budgets. It’s all about national plans.
But Eurozone stimulus plans so far have been inadequate to generate further demand. Balance sheets tell the tale. For 2020, Chinese stimulus to support its exporters and US stimulus to support households buying goods largely made in China basically drove the global balance of trade and helped it recover more quickly than during the Global Financial Crisis. Most European economies have done a great job of staving off job losses for now and avoiding financial ruin, but are also struggling with how to best recover. In August, the Eurozone economies experienced deflation for the first time in 4 years. Translation: demand is falling. That’s a huge problem too, since the Eurozone depends on exports for about 45% of GDP. That means that other counterpart economies within and outside the Eurozone have to be buying to keep incomes and profits up, and thus to sustain employment and, by extension, domestic demand. Recovery, therefore, entails fundamental questions about the structure of economies and the Eurozone itself. Balance sheets have to add up, and depending on who wins and loses, sluggish recovery and even worse inequality follow.
I’m not proffering a quick fix or even identifying much more fine-grained problems or solutions. The point is merely to acknowledge that since economies are composite structures that produce distortions, reward certain groups, depend on certain people wanting to buy certain things to grow, any durable recovery plan is not just about the domestic front. There is no COVID Marshall Plan. McDonnell and other MPs well-versed in economics know this. It’s an empty rhetorical gesture designed to sell their policy preferences without getting to the hard bit. Any “Marshall Plan” requires coordination that, in the current circumstances, seems impossible. Until the US election results are in and some sort of clarity emerges as to what to expect across the Atlantic, there’s little cause for optimism.
Brexit talks don’t lend themselves to expansive coordination with European economies. But Labour can only provide a meaningful path forward by engaging proactively with the reality that a huge share of the national income depends on people buying “British” things abroad, and that income can only be earned, taxed, and redistributed effectively with the help of foreign economies. The party needs to start building bridges with other parties in power and opposition elsewhere, regardless of where they fall on the Left or Right. Rising tides don’t lift boats whose keels are coming apart. One decade lost to austerity shattered far too many people’s lives in this country. Another lost to rising inequality, protectionism, and a failure to invest will make things all the worse.
Nicholas Trickett is a political risk analyst and writer with extensive experience covering energy and trade politics and political economy in Russia and Eurasia, including a stint as an energy consultant. He holds an MA in Russia and Eurasia regional studies from the European University in St. Petersburg and an MSc in international political economy from the London School of Economics and Political Science.