Major backlash looms if governments have got this wrong

The world’s reaction to the Covid-19 pandemic could have a devastating effect on livelihoods, writes

IN January 1919, the US was in the midst of the Spanish flu pandemic. Hundreds of thousands of young, healthy people would end up dead, a pattern replicated across the world at the time.

In that same month, the US government started measuring how much the nation’s factories were producing each month.

They initiated this vast and costly exercise because, on entering World War I less than two years earlier, they found that they did not know much about their capacity to make the weapons needed to fight the first major conflict of the industrial era.

As it happens, the third and final big wave of the Spanish flu hit the US in the spring of 1919. Those same figures show it had no significant effect on output from the country’s factories.

Things are very different today. The monthly decline in American manufacturing in April was the biggest in more than 101 years of counting. Not even in times of war, their industrial demilitarising aftermaths or the Great Depression were contractions larger than the coronavirus collapse.

Today, mass unemployment is spreading across the US and much of the rest of the world. This, again, is very different from the last pandemic. Accounts of the Spanish flu period in the US point to a shortages of workers, as the illness afflicted so many in the prime of their lives. Historian Ida Milne’s detailed and definitive account of the Spanish flu in Ireland, Stacking the Coffins, suggests a similar pattern in this country.

As the fatality rate of both diseases appears to be similar, the very different economic outcomes reflect in large part the changed way the world today looks at risk. A century ago, people lived with a much higher risk of death. Diseases such as TB were rampant. As Milne notes in her book, around twice as many deaths took place on this island in normal years a century ago as occur in the 21st Century, and that is before accounting for today’s larger population.

For now, governments and peoples in most countries are prepared to accept mass unemployment to reduce the risk of having the disease spread.

It will be a long time before hard conclusions can be drawn about the handling of the disease, but if most of the world has got the balance of risks wrong, or if that perception takes hold, there may well be a backlash against governments and medical experts. The latter could become the bogeymen and women of the coming slump, just as bankers played that role in the last one. And the scale of the slump is beginning to become clear. Last week, we found out how Europe’s factories are doing. Manufacturing across the continent suffered its worst month on record. Output fell by more than 10pc in March compared to February.

If there was glimmer of good economic news it was that Ireland not only bucked the trend by recording an increase in stuff made in its factories — it recorded a 15pc surge in output. The reason is because this country is a global hub in the making of pharmaceuticals and medical devices.

Last Friday’s numbers on the value of goods shipped overseas showed that

Ireland Inc earned more from the rest of the world in March than in any month in history. The growth was driven entirely by the pharma industry, which sold more than €10bn of product overseas in that month alone.

As European and other pharma companies seek to reduce their exposure to long supply lines, there is a possibility that production of medicines, chemical components and equipment will shift out of faraway places like China and India. As an established pharma hub, Ireland could expect to get more than its fair share of investment moving westwards.

But even a strong pharma sector will not be enough to spare this country from recession — only a medical breakthrough on Covid-19 can do that now.

One of the gloomier pictures to emerge from last week’s economic data, including Friday’s GDP numbers, was an emerging north-south gap in Europe. The already weak southern countries are plunging faster towards depression.

This is partly a timing issue. Italy, in particular, locked down sooner, followed closely by Spain. France, whose lockdown was among the continent’s most severe, had the biggest contraction of any country. A decline of 5.8pc in its GDP in just three months was breathtaking, coming in around three times bigger than the contractions recorded by Germany and the Netherlands.

Even more attention will now be focused on the Nordic countries. Finland recorded a marginal increase in GDP in the first quarter of the year, while Sweden recorded a marginal decline (Ireland’s numbers haven’t been published yet). Sweden has taken the least aggressive response to shutting down its economy of any European country.

If these patterns continue, it may be that a stronger northern recovery helps drag the south towards recovery. The northerners may also feel better positioned to help the south financially, although that is unlikely. Further strains between the two parts of the continent are more likely.

Another issue already causing strains in Europe is business supports. In normal times, the European Union’s rules on governments giving taxpayers’ money to companies are strict.

These ‘State aid’ rules are designed to prevent one country giving its companies an unfair competitive advantage over those from others. The level playing field they maintain is of particular importance for smaller countries with less clout.

In these abnormal times, the EU’s State aid rule book has effectively gone out the window. Countries are doing very different things to keep businesses from going to the wall.

Germany, the country with the most clout, has gone furthest, guaranteeing whole swathes of its private sector.

“Lufthansa is going around hoovering up State aid like the drunken uncle at the end of a wedding,” Ryanair’s Michael O’Leary said last week of one of his main (German) competitors. This is just one example of how some businesses feel they are losing out because different countries are doing different things for their companies. The matter is causing further strains between the fiscally stronger countries, which can credibly stand behind their businesses, and weaker ones, which are staring into the abyss.

Another issue bubbling under the surface is banks. Everywhere, they face trouble. Economic shocks of the kind currently being suffered lead to more dud loans.

Within Europe, how to classify cases of people who are not making repayments on their loans is increasingly a bone of contention, with a north-south split — again — on the matter. This issue can be expected to come to the fore in the months ahead as bad loans start piling up.

There was some better loan news last week. On Thursday, the Irish State borrowed €1.5bn. Almost half of the money won’t have to be repaid until midcentury. The interest rate demanded by the lenders was next to nothing. This shows that borrowing to fund emergency health, welfare and business support measures can still be easily and affordably done, for now at least.

‘The EU’s state aid rule book has effectively gone out the window. Countries are doing very different things to keep businesses from going to the wall...’