By EsadeEcPol

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Toni Roldán, Director of EsadeEcPol and David Henneberger, Head of FNF Madrid Office, discuss the future of capitalism and the impacts on globalisation after the Covid-19 pandemic with Andrés Velasco, Dean of School of Public Policy at London School of Economics, and Luis Garicano, Vicepresident of Renew Europe. 

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Webinar questions:

  • How hard will coronavirus hit the economy?

  • How will the Covid-19 crisis affect globalisation?

  • What will happen with populism and nationalism?

  • How will inequality affect politics and can we minimise it?

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VIDEO TRANSCRIPT

David Henneberger: These are truly remarkable times. We are facing the biggest health crisis since the Spanish Flu, and subsequently, probably the deepest recession in 100 years. We have restraints on civil liberties around the world, and we have disrupted supply chains, which will probably never be the same again. And with all of this, we are confronted with a dangerous lack of international leadership, and also with a lack of trust in international relations. Some important questions have to be raised against the background of these circumstances.

How hard will coronavirus hit the economy?

Andrés Velasco: If it is very short-lived, then I think we have a chance of having a deep recession, but then a quick recovery. However, there are two things that stand in the way of that happy outcome. One is that we have to preserve what one might call employment relationships. A firm is not just a bunch of machines and a bunch of employees. A firm is a bunch of people who come together, who have been recruited, who have been selected, and who learn to work together. A lot of the productive value of a firm is in that combination of human beings. If because of a lack of cash, or lack of liquidity, you're forced to send those people home, and then six months or a year from now, you say: ‘Well guys, come on back and we'll start production again." Then, you will find that many will have got another job, or moved to a different city or country. So, the lasting effect on productivity could be gigantic. That's issue number one.

It is easy to imagine situations in which a productive and employment crisis morphs into a financial crisis

The other issue, of course, is that if a firm has no cash, it may default on its workers, and it may also default on its creditors. That means not paying debts, and it is easy to imagine situations in which a productive and employment crisis morphs into a financial crisis. Rich countries with powerful central banks have many ways of avoiding that, and we've seen the Fed, the ECB, and the Bank of England, doing things that would have sent most academics home with a heart attack just a few months ago. Not simply buying government bonds, but buying corporate bonds, and even junk corporate bonds. So, I think there's a fairly good chance that a fully-fledged financial crisis may be averted in Europe, and the UK, and USA.

If you are a middle-class citizen in a middle-ranking country, you can go home for two months, not make any money, come back, get your pay cheque in month three, and live with it. If you're a person who sells candy on a bus, or on the sidewalk in Mumbai or São Paulo or Manila, then chances are you don't have any savings. You don't have any other sources of income, so if you don't go out to work, you simply don't eat. Secondly, because lots of firms in developing countries are informal firms, and lots of employment relationships are informal, governments can’t step in and say I will pay your way through three months because there's no contract. There's no pre-specified wage. Who is the government going to pay, and at what rate is it going to pay?

If the problem is going to be big in the rich world, it is going to probably be bigger in the developing world

In addition, lots of emerging countries are suffering from a quadruple whammy:

  1. There's less demand from rich countries for their exports.
  2. The prices of commodities (beginning with oil, but not ending with oil) are in the basement.
  3. Some important source of income like remittances, say from the US or Europe, to countries like Mexico, Guatemala, or the Philippines, are plummeting.
  4. And last but not least, we've seen in the last couple of months, the biggest capital outflows that we have ever seen. So, if the problem is going to be big in the rich world, it is going to probably be bigger in the developing world.

How will the Covid-19 crisis affect globalisation?

Luis Garicano: Everything from how we travel in planes and trains, to how we visit beaches or restaurants is going to change, and that crucially affects a lot of what globalisation has achieved. I don't think over the next few months, or in the foreseeable future, we are going to be able to just jump on a plane and go to another country for the weekend. If this is so in, say the Schengen Area, then it's really endemic in places like Africa or Latin America. You can envisage how borders will be closed, and people will be told they cannot travel from certain places.

The flows of people that cause so much concern and political crisis in Europe are tiny compared to the flows of people in other parts of the world

Andrés Velasco: There is a risk in this crisis that we engage in confirmation bias: meaning enemies of globalisation are saying yes, of course, this is the end of globalisation; people worried about inequality are saying the crisis will deepen inequality; people who worry about XYZ, are saying I told you that XYZ was going to be an issue. I would be a little bit more careful. I agree with Louis that there are two dimensions in which we will see changes: firstly, in the mobility of people we were seeing changes, at least in Europe, long before this crisis, and some of that change will continue. I will note, just as a footnote, that the flows of people that cause so much concern and political crisis in Europe are tiny compared to the flows of people in other parts of the world. Secondly, where essential or strategic supplies are concerned, I think we may see a bit more government intervention, but I think the firms themselves will begin to look at making supply chains more secure. Rather than a black-or-white situation in which it is all-globalisation or no-globalisation, I think we may have a reshuffling of globalisations in which there are some winners and some losers, but I'm pretty sure we will continue to trade.

We may have a reshuffling of globalisations in which there are some winners and some losers, but I'm pretty sure we will continue to trade

What will happen with populism and nationalism?

Andrés Velasco: My first point is that we should not simply sit back, have a drink, and expect that the populists will be booted out just because they are bungling incompetents. That would be way too optimistic and complacent. I think what will really make a difference is if when coming out of this crisis, the populations feel that it was hard, we suffered, but we were all in it together – as opposed to some people enjoying privileges and getting an easy ride, while others did not.

I'm speaking from West London right now, and I've been talking to lots of my English friends about London today compared to London in 1940. The city was locked down back then, like the city is locked down today. I'm also reading a great book about London during the war, and what many English historians say is that the sense of national unity and purpose that was very clear in the UK for the last 40 years, even during some pretty bad economic times in the 60s and 70s, came from the fact that the war was terrible, but the British stood shoulder-to-shoulder and they defeated the fascists. They defeated the Nazis, and the rich guy from Oxford, and the poor kid from a mining town, were both down in the same trench fighting the same enemy.

If Western countries can come out of this crisis with the spirit in which people applaud the National Health Service, governments will be viewed as working for ‘us’ and not just working for ‘them’

If Western countries can come out of this crisis with the spirit in which people applaud the National Health Service every Thursday night in London, or in the spirit in which people in Barcelona or Madrid or New York applaud health workers, then I think the institutions of liberal democratic government will have been strengthened. These governments will be viewed as working for "us" and not just working for "them."

But I can also imagine an outcome which is not 1945. It looks more like 2010 and in which people say: "There are these academics and lawyers and other professionals sitting in their comfortable apartments and working from home, and they keep getting their pay cheques, and I work in a pizza parlour and the pizza parlour is closed, and I can't do my job, and I'm not getting paid."

So, society again fragments into many identities, and some identities feel disrespected and mistreated by other people, in which case almost regardless of public policy, the institutions of government and liberal democracy will come out a little shaken. Which one of the two will it be? I think, as they say in the United States, the jury is still out – but we will know pretty soon.

The biggest gap in this crisis is between those who can work from home and those who can't

How will inequality affect politics and can we minimise it?

Luis Garicano: The biggest gap in this crisis is between those who can work from home and those who can't. I bet the three of us have had a more productive month in the last month than probably any other month in the last few years. I have not had any wasted meetings or trips. As an MEP, I usually have to go to Brussels and Strasbourg or Madrid all the time. I haven't wasted time in meetings. I have basically been working very well seven days a week, morning to night. I haven’t lost a minute of activity. So the difference between those who can work from home, and those who can't, is going to affect information workers – who were already helped by the information revolution – versus the rest.

Rural areas are going to benefit because more people will want to live outside big towns

This is something that goes in the same direction as past changes, but there is one important thing that I think is very different. In the past, let's say in the 1990s, if you asked any of us what do you think the internet will do, we would have said that it will go against big cities in favour of rural areas, because people will want to live in a beautiful place in the middle of nowhere, rather than be in a city. But that didn't happen – the internet helped cities because people wanted to be near others, and so creative types wanted to be together with other creative types. Now this is different in my opinion.

I think that the attractiveness of a city decreases when you can’t go to a restaurant, or a bar, or a museum, or a concert. Living in a little town, or in a village where you can just walk around the mountains is more attractive – if you can get internet and work at home. I think rural versus urban is maybe one vector of inequality that is going to go in a different direction than in the past. Rural areas are going to benefit because more people will want to live outside big towns.

I think generation aged 36-40 is going to suffer the most because they haven't been able to accumulate assets

On demographics, those people who came out of university or high school in the last crisis have had very hard years and have only seen their situation improving from let's say 2015-16. These people have just started to get steady jobs – remember in Spain we still had 14 percent unemployment – and this same generation (aged 36-40) is now getting hit by a second blow. I think that this is the generation that is going to suffer the most because they haven't been able to accumulate assets. And when we prepare policy we have to think of that generation.

Thirdly, on geography, I don't want to make the distinction that was so well made by Andres, but I want to make a north-south distinction inside the European Union. By a mixture of bad luck and bad government, the countries worst hit in the European Union are the countries with highest debt, and they were also those countries worst hit by the 2008 crisis – namely, Spain and Italy. The geographic tensions inside European Union are going to be very big, and they are going to potentially have very difficult consequences for Europe.

Toni Roldán: Thanks very much to Luis and Andres. It was fascinating to hear from you both. Thank you everyone for following us. Thanks to the Friedrich Naumann Foundation for Freedom for bringing about this initiative and thanks to you all. I hope I'll see you again very soon.

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