Manuel Aguilera, General Director of MAPFRE Economics.

Major crises are often decisive moments in the evolution of economic thinking. The ideas that emerge from these circumstances, whether they are explanations of the phenomena or measures to tackle them, become turning points in how we interpret the economy and how we intervene to improve its performance.

With the arrival of COVID-19, the world finds itself in a situation that is unprecedented in many ways. The pace of economic growth is expected to drop sharply in 2020, at levels not seen since the Great Depression almost a century ago, and economists are talking about recoveries that are V-shaped, U-shaped, W-shaped and L-shaped, and which could extend through 2021, 2022 or even beyond. The fact is that this economic contraction has not been caused by fundamental vulnerabilities of the economy itself, but by social distancing measures brought in to tackle an external factor. Therefore, the ultimate impact of the crisis will depend both on how quickly an effective vaccine or therapeutic treatment can be found and on the effect that the suppression measures have on the economic structure and on the vulnerabilities that were already there before the pandemic. This is not at all like the sort of crisis that economists have studied over the years, meaning we need to come up with new ideas to tackle it.

So while we may gaze into the crystal ball in search of numbers that will save us from uncertainty, we also need to scan the horizon. By doing so, we may discover more structural explanations, which will in turn lead us to find measures that will enable us to overcome this unusual and complex situation, and, in a broader sense, build the foundations of an economy that is more resilient in the face of crises like the one we face today. Given the degree of uncertainty in quantitative economic forecasting in today’s world, it may be wiser to reflect on issues we have some degree of certainty about.

Firstly, it is clear that humanity is facing its first truly global major economic crisis; a crisis in which, paradoxically, globalization—the main driver of the world’s economic transformation since the end of the last century—has become the main catalyst. Thus, the task of both restoring production chains and laying foundations that will mitigate similar disruptions in the future must be viewed through the prism of policies and instruments of a global scale that complement policy measures on a national level. Working counter to this, however, is the clear fact that post-war global institutions have been weakening in recent decades. The pandemic has exposed these institutions’ inability to react effectively, whether it be economic and financial institutions like the International Monetary Fund or health-related institutions like the World Health Organization. There is therefore a clear need to rethink the institutional framework, as this framework will be key to tackling the crises of the future.

Secondly, this crisis has revealed the extent to which the two traditional instruments of economic policy have been exhausted. This has come about as a result of wear and tear and inadequacy. On the one hand, monetary policy has failed to “normalize” after the 2008–2009 crisis, with ever-expanding balance sheets and near-zero or negative interest rates, while fiscal policy lacks the wiggle room to stimulate aggregate demand due to high levels of public debt. On the other hand, the fact remains that monetary and fiscal policies are insufficient, as they only marginally influence other key elements that have been affected by this crisis. We therefore have to consider a more comprehensive public policy model, including instruments that influence other economic factors (the labor market, the financial system, productivity, public-private collaboration), as well as social aspects (measures to strengthen health systems and, more generally, to moderate the polarization that the crisis has brought with it).

Thirdly, the current crisis has not only had an impact that goes beyond the economic, it has also shown that measures to counter it and create resilience need to have a long-term dimension. Issues that were considered “structural” before the emergence of COVID-19 (savings, pensions, the labor market, health systems, social safety nets, etc.) have now been shown to be essential aspects that must be addressed in the short-term to deal with the problems that have been accelerated by this situation. In this way, the reconstruction effort will mean transforming the long-term today. From that perspective, the current crisis could become an opportunity to address structural issues, an opportunity that may not have arisen without the health emergency. And tackling these structural issues is the only way to strengthen the efficiency, competitiveness, equality and sustainability of the world’s economies.

Finally, the current situation has shown that, alongside the health crisis and its economic consequences, global society also faces a governance crisis. Pandemics do not recognize borders. Our responses—health first, then economic—must therefore entail global action, not merely domestic measures. However, with the rise of populism, governments’ technical capacity is weakening, and there is often reluctance to strengthen global dialog. Humanity is facing perhaps the greatest challenge in its history, with political leaders that may be the least suited to the task. This is a challenge that liberal democracies have faced before – this crisis has simply shone the spotlight on it once again.

It is difficult to anticipate what the global economy will look like in the post-pandemic period, but it will certainly be one that requires forms of organization based on new economic thinking and renewed forms of international cooperation. Intellectually speaking, this moment is perhaps not so different from those that others, in extreme situations, have had to face in the past. As then, it will be necessary not only to look back at the pantheon of economic thinking, but also to reflect deeply, bearing in mind that global society has to take precedence. This will allow us to identify the ideas that will make it possible to build a more resilient economic system.

Global society is facing a crisis that is not only unique, but also in many ways a foreshadowing of the future. Today’s reality is anticipating the kind of crisis that humanity will face in the future, much like Cassandra in Homer’s epic poem. But we must break the myth, believe the prophecy and be prepared to make the future possible.