What If Whatever It Takes Is Not Enough?

Countries must overcome nationalist impulses and mistrust to coordinate a global response to the virus

- Shawn Donnan

After a halting start, governments and central banks have finally been coming to grips with the economic consequences of the coronavirus outbreak. The Covid-19 disease is more than a health crisis. What seemed like an alarmist scenario a month ago—a global recession—now appears a certainty. And the extreme measures needed to limit infections may intensify the slump.

Maurice Obstfeld, the International Monetary Fund’s former chief economist, says you’d have to be optimistic to believe we’re experiencing something akin to the recession caused by the financial crisis, when global output in 2009 shrank 0.1%, according to IMF data. As governments restrict travel and close restaurants while manufacturers prepare for temporary shutdowns, major economies are now experiencing a “hard stop,” which could inflict a toll that may be closer to the 9% contraction Greece endured at the height of its sovereign debt crisis, he says. “We are seeing a collapse of economic activity as countries try to get a handle on this disease,” Obstfeld says, pointing to the plunge in industrial production and consumption in China as evidence of what lies ahead for Europe and the U.S.

The extent of the damage, he says, will depend in large part on the scope and duration of the outbreak. But a lot relies on governments acting in unison to roll out aggressive measures that ease the pain for big businesses (think airlines) as well as the little guy (your neighborhood bartender). At the same time, central banks need to do everything in their power to prevent what began as a health crisis from morphing into a financial meltdown.