The 2008 global financial crisis left the world reeling from the near-collapse of the global financial system and recovery has proved slower and more protracted than most expected. Despite the seeming restoration of normalcy in the global economic processes over the past decade, the crisis triggered by the coronavirus epidemic has brought to light the structural weaknesses of the system and may be the harbinger of a new world order.
Since the financial storm of 2008 subsided, the leading economies of the world have been busy “solving” the mortgage crisis and managing the economic recovery. The growth cycle that ensued in the past decade has been one of the longest but at the same time one of the slowest in modern history. This development, however, is not completely surprising. The payment system that had been the backbone of the pre-crisis economy, all but collapsed as the subprime crisis ate away the very basis of that system.
Where we stand today
Global banking networks and processes have not returned to their pre-2008 way of operation even to this day. The immense amount if liquidity pumped by central banks around the world have only partially ended up in the real economy, leading to a slow and uneven recovery. The beneficial impact of the excess liquidity provided by central banks was mostly enjoyed by markets that were “close to the fire.” As a result, the years of recovery have been marked by a stagnating amount of global liquidity and this is where the global economy stood when the coronavirus crisis engulfed the globe.
In March, international financial markets were concerned that the panic caused by COVID-19 may trigger a new wave of liquidity shortages. Luckily, major central banks – having learnt from the events of 2008 – were quick to react. It took the Fed only a few weeks to start pumping liquidity into the system and launch new instruments, such as FX swaps, thereby providing USD funds to other economies.
What will change?
While the previous crisis started with debt markets coming to a complete halt, which then later spread to the real economy, the current crisis shows the opposite situation. The fear of COVID-19 contagion has primarily hit the real economy both in terms of supply and demand, but banks have thrown a lifeline to companies by providing cheap credit through various corporate lending schemes.
Despite a lending boom of sorts and state aid programs, there is no guarantee that once the crisis blows over, everything will return to normal. A deep recession may bury entire sectors (i.e. tourism), endangering well-established trends, systems and market practices. In a possible post-crisis scenario, the global real estate market may undergo fundamental changes with the office market segment seeing an unprecedented decline as a result of the spread of home-office practices.
Supply chains in the industry may shorten considerably as companies realize that a more locally-focused supplier policy would boost their ability to withstand crises even if production becomes more expensive. This change would entail a restructuring of global manufacturing and transportation systems, impacting economies around the world.
Demand for across-the-board automation may increase exponentially, leading to fewer people active in production and putting emerging economies that rely on cheap labor at a considerable disadvantage.
These are just some of the changes that may emerge as a result of the COVID-19 crisis but many more transformations that would fundamentally reshape the global political and economic power structure, are likely to occur.
Europe’s path to reinvention
Amid the rapidly shifting realities of the current crisis, it’s critical that European business leaders switch from stabilization and survival to renewed growth and competitiveness. “There is a unique opportunity today to shrug off old limitations and reconsider new ways of operating. European organizations that take the steps to reinvention … will not only outmaneuver the uncertainty of COVID-19 disruption, but also have the chance to close the gap between them and their North American and Asia Pacific competitors,” Accenture said in a report published earlier this month. According to the report, it is imperative that European businesses focus on accelerating the digital transformation, leading the sustainable revolution and pursuing next generation collaboration to take advantage of post-pandemic opportunities.
“Europe is at a crossroads. Its business leaders now have a choice. They can continue down well-trodden strategic and operational paths. Or they can explore a new way forward, one that’s based on innovation and high-potential technologies that blend with Europe’s traditional strengths of sustainability, solidarity and purpose,” according to Accenture.