Shutdown: How Covid Shook the World's Economy

by Adam Tooze

The affluent 10 percent in advanced societies who hold the most financial wealth received a stimulus that dwarfed anything openly declared in the public accounts.

With an annual economic output of over $3 trillion in purchasing power parity, Brazil is a giant among the emerging markets. Dwarfing the rest of Latin America, it ranks alongside Indonesia and Russia, behind only China and India. In the spring of 2020, Brazil faced a financial storm. In a matter of months, it saw the value of its currency plunge by 25 percent, delivering a huge hit to anyone buying imported goods or servicing debts denominated in dollars.

no one could pretend that the capital flows in the 2010s, pushed by central bank policy in the West and pulled by the roaring development of China’s state capitalism, were responding to what used to be known as market forces. If the advanced economies were undergoing a silent revolution in fiscal and monetary policy, if the Fed, the ECB, and the Bank of Japan were increasingly in charge of bond markets, then this had implications for the emerging markets too.

In 2020 the emerging markets demonstrated their ability to ride out even a very severe capital flight. But coronavirus was not like other crises. Cushioning the financial blows was one thing; managing the impact of the crisis on the real economy was quite another.

But for all the bad luck, the crisis in Guayaquil revealed far deeper problems not just in Ecuador, but in Latin America at large.46 The fragility of public services in Guayaquil, a city deeply divided along lines of class and race, was symbolic of a continent-wide malaise that long predated the Covid crisis.

Latin America is the most unequal continent in the world. While big businesses thrived, 54 percent of the workforce is in the informal sector—140 million workers all told, a figure comparable to the migrant labor forces of India or China.48 Crowded in giant, sprawling informal suburbs that dominate the urban landscape of Latin America, they were easy prey for the virus.

By July, at 289 percent, Lima had the highest excess mortality of any major city in the world. In November, President Vizcarra was removed by parliamentary impeachment vote, and Lima erupted in a month of violent protests. In an effort to calm the protests, the parliament installed a former World Bank technocrat as the interim president until new elections could be held in 2021.

The Venezuelan economy was spiraling toward disaster as regular supplies of electricity were interrupted. In the country with the largest oil reserves in the world, 90 percent of the population had no access to petrol. 55 There was serious fear of harvest failure for lack of gasoline on the farms.

By September 26, over 139,000 Mexicans had died of Covid, 1 in 1,000 of the population, second only to Peru.61 It was Mexico and Brazil, the two giants of Latin America, that would turn the region into the new center of the global pandemic.

With regard to the pandemic, the failure of presidential leadership in Brazil was near total. As the disease spread from the globe-trotting jet set in São Paulo to the rest of Brazilian society, President Bolsonaro continued to deny the seriousness of the situation.62 It was left up to Brazil’s state-level governments—regions the size of European countries—to react. The partial lockdowns that they were able to organize slowed the spread of the disease. But these also caused economic havoc. The virus exposed the huge gap between Brazil’s powerhouse global corporations and the millions of small businesses that account for the bulk of employment. Official unemployment, which was already around 12 percent at the beginning of 2020, lurched upward toward 15 percent, and official statistics had little to say about the 40 million informal workers who make up almost half the Brazilian workforce.

The question in 2020 was whether the coronavirus crisis would push Italy over the brink and unleash a second and even worse crisis of the euro area. If so, like the first one, it would be more than a European affair.

For the duration of the crisis, the EU had lifted all restrictions on national budgets, allowing the crisis-hit countries to spend as much as they needed. It had also lifted all rules on state aid. What would happen in the aftermath? What if the strongest countries powered ahead, compounding the preexisting financial and economic divisions within the euro area? It would drive Europe apart.

15 It turned out that the emotional distance enabled by Zoom was very bad for European politics.

there was no disguising the explosive nature of the question: What was the appropriate level of legal and political oversight over the ECB?

One might not be sympathetic to the plaintiffs or their politics. In financial matters, the justices seemed out of their depth. They took at face value evidence from the most conservative wing of the German economics profession. But for all that, they gave voice to a real historic bewilderment. What were central banks doing? Did they have a mandate? Weren’t they supposed to be about inflation control? Why were they lowering interest rates to zero to boost inflation? Who paid? Who benefited? Who was overseeing the central bankers?

Since the massive interventions following the 2008 crisis, these questions had been posed on both sides of the Atlantic. In the United States, the Fed’s role was questioned by an array of opinions ranging from paleoconservative proponents of the gold standard, via technocratic advocates of monetary policy rules, to left-wing supporters of Modern Monetary Theory and gung ho advocates of cryptocurrencies.

As a near-universal experience, the coronavirus pandemic concentrated minds across the world on a single issue, inducing identification, comparison, and sympathy across borders—Chen’s convergence, linkage, induction, and amplification effects. European public opinion had been deeply stirred by the nightmarish images from Lombardy of exhausted nurses, overflowing morgues, and lonely funerals. Polls in Germany showed a groundswell of public opinion calling for those countries who were relatively well placed to do more to help.25 This extended to financial issues as well.

To cut off a nationalist backlash, Merkel needed to make a show of leadership. In Berlin, the case for the deal was strongly argued by the SPD-controlled Finance Ministry, which was determined to avoid sliding back into the trench warfare of the eurozone crisis. Finance Minister Scholz had his own hotline to Paris.30 But if we are looking for a deeper motivation, it derives from Merkel’s appreciation that the coronavirus presented Europe with a new type of challenge, a harbinger of the new era of violent environmental shocks. It was telling that in the pivotal press conference with Macron on May 18, Merkel made the point that Covid was the kind of crisis that demonstrated the obsolescence of the nation-state. “Europe must act together, the nation-state alone has no future.”

She was thinking about the bigger strategic question of the European economies and of how such public health crises might be managed in the future, through joint surveillance, countermeasures, and vaccine development. This functionalist logic, the unfashionable common sense of the globalization era, was Merkel’s lodestar.32 It was not a matter of faith or idealistic commitment to liberal internationalism. It was simply realistic. In a world of complex new challenges, European cooperation was more urgent than ever. The centrifugal tendencies amplified by 2020 had to be stopped. Platitudes of globalese morphed into drivers for urgent action.

with the UK out of the picture, the powerful mainly Western European members of the euro area had asserted themselves within the EU as a whole. They had established the possibility of EU debt, and on that basis they had given Brussels a meaningful countercyclical fiscal capacity. Skeptics would insist that it was no more than a provisional response to an emergency. Whether any of it would become permanent was an open question, but the precedent had been established. For once, undeniably, the EU had scored a political success. It broke the negative momentum that hung heavy over Europe in the spring. And one place this was strikingly evident was the financial markets.

Far from being a dangerous and regrettable liability, good quality public debt was indispensable fuel for private finance.

The ECB refused point-blank to answer to the German court, the German parliament, or any other national political body. It would answer to the European court and the European parliament. If, however, the Bundesbank as a member of the euro system in good standing requested documents pertaining to interest rate decisions, which it in turn chose to share with the German parliament, there could be no objection to that.44 If that satisfied the German court, so be it. Not having the stomach for a fight, the German justices nodded it through.45 It was not so much an answer to the challenge as a wet blanket thrown over a political dumpster fire.

And the ECB innovated with more than just policy instruments. Like the European Commission, the ECB had joined the green bandwagon. In her confirmation hearings with the European parliament in 2019, Lagarde had emphasized her determination to open the question of the ECB’s responsibility with regard to climate change.49 As the commission began sketching the spending plans for NextGen EU, Lagarde initiated a round of discussions with civil society groups calling for central bank bond buying to be slanted in a green direction.50 It wasn’t just a matter of supporting general government fiscal policy or approving new taxonomies of “green bonds.” Key figures in the ECB’s leadership indicated that they saw no reason why the bank should maintain “neutrality” in its purchase, for instance, of the bonds of European oil companies, when it was clear that the financial market was not yet fully pricing in the risk of climate catastrophe.51 The matter was far from settled, but the fact that the idea could even be aired suggested how far the ECB had moved. Central bankers were kicking over the traces.

Europe was, in fact, spared most of these blows, but opinion polls show that people understood coronavirus as an indication of how seriously to take tail risks.56 The year 2020 had been billed as one of climate action. The key date was to have been COP26 in Glasgow in November.57 Five years on from the Paris climate agreement of 2015, it was time to update the so-called Nationally Determined Contributions (NDCs) to decarbonization. If Europe was to maintain its credibility as a climate leader, it needed to do better than the 40 percent cut by 2030 it had promised in 2015.

By the summer, European relations with the American government were so toxic that Merkel turned down Trump’s invitation to a G7 meeting in Washington.60 Perhaps the U.S. election would bring a new start in the White House, but after the Trump presidency, nothing could be taken for granted. Beijing, not Washington, was the key.

In 2020 China was responsible for more carbon dioxide emissions than the EU and the U.S. put together, but it was also the world leader in solar and wind power, EV cars, and high-speed rail transport. Indeed, since the early 2000s, German and Chinese development in all these areas had been joined at the hip. It was cheap Chinese solar panels that dotted the rooftops of Germany. Germany’s world-leading car manufacturers were developing their new electric models in and for China. VW alone had poured $17.5 billion in investment into its EV ventures in China.

At Paris in 2015, China had accepted the need for all countries, not just the advanced economies, to propose decarbonization plans. Would Xi Jinping commit to a peak for China’s emissions and fix a date by which it would achieve carbon neutrality?

As a signal of their seriousness on July 23, the European Commission launched a public consultation on the introduction of carbon border adjustments.62 The year 2023 was envisioned as a possible start date. For emissions from industry and electricity generation, Europe had for the last fifteen years been operating an emissions trading system. Like any other form of quasi money, the value of the emissions allowances depended on the credible commitment to keep the certificates scarce relative to demand. On that score, Europe’s record was, to say the least, checkered. But after many false starts, in 2020, the price of emitting a ton of carbon surged to 30 euros, and the outlook was for further increases.63 This would put Europe’s most polluting power plants out of business. By the same token, it also put cost pressure on what was left of Europe’s manufacturing industry. To offset that disadvantage, it was essential to impose a carbon border tax on imports manufactured with more polluting power abroad. Given that Europe was China’s major export market and that China relied heavily on coal-fired electricity generation, this was an alarming prospect for Beijing.

Following the European lead, China was in the process of launching its own carbon pricing system.64 What the Europeans wanted was a matching commitment from Beijing to decarbonization, thus constituting a climate club led by the number one and number three emitters in the world.65 Would Beijing take the bait?

“China will scale up its Intended Nationally Determined Contributions by adopting more vigorous policies and measures. We aim to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060.”

China, the greatest fossil fuel economy the world had ever seen, was committing itself to the end of the carbon age within forty years. Behind the scenes, the step had been prepared by a team of climate scientists at the elite Tsinghua University led by veteran climate negotiator Xie Zhenhua.4 Beijing had dropped hints in talks with the EU over the summer, but Xi’s announcement on September 22 came as a surprise. It was disorienting. Climate policy advocates, both in Europe and around the Biden campaign in the United States, had always assumed that they would have to bargain China into a bold move. Now Beijing was preempting and surpassing anything that the Western emitters could offer.

For the first time in thirty years of climate negotiations, the world’s leading emitter was committed to radical action.7 Within weeks, South Korea and Japan had followed China’s lead, pledging themselves to neutrality by 2050.

This was to be one of the characteristic ambiguities of 2020. China made a move to set the agenda. The public in much of Asia and Europe reacted with skepticism or outright hostility. The increasing assertiveness of Beijing was unsettling, and its ruthless repression of dissent in any form was alarming.

But as suspicious as the public was and as aggressive as U.S. policy would become, there was a powerful countervailing force. China was not suffering the crisis and dislocation the rest of the world was.10 Any suggestion that coronavirus would rock the legitimacy of the CCP’s rule had proven wildly off the mark. China’s economy was bouncing back fast.

By the fourth quarter of 2021, they expected China’s recovery to open up a huge gap with all the other major economies of the world. That economic growth exercised a magnetic attraction on powerful interests across the West. Around the world Chinese-manufactured goods and software applications shaped everyday life. In many places Chinese money and technology were reshaping the infrastructure of energy, communication, and transport. Back and forth, China and the rest of the world repelled and attracted each other.

They were the exceptions. As Chinese suppliers chased the boom, reports of quality defects multiplied.15 Shoddy goods compounded European distaste for the crude propaganda message that accompanied them.16 Rather than generating warm feelings of solidarity, China’s attempt to exercise soft power triggered calls for self-sufficiency.

The pandemic made self-sufficiency seem alluring, but as defenders of free trade pointed out, the discussion about the global supply of PPE was based in large part on false premises. China was far from monopolizing global production.18 And the idea of a comprehensive reshoring, on account of Covid, was illusory as well.19 It was not just costs, but sophisticated networks of suppliers and systems of logistics that made China attractive for modern manufacturing. Those advantages did not evaporate overnight because of a few substandard masks or defective Covid tests.

The global politics of the virus drove home the point that the “China shock” meant something different, depending on where you were in the world.

When the “two sessions” finally convened on May 21, Xi was paramount. The time had come to make a move on one of the most sensitive areas of China’s internal politics—Hong Kong.

In 2019, China accounted for 27 percent of total global economic growth.42 In the process it overtook the United States to become the largest consumer market in the world.43 In 2020, it was the only major economy in the world still growing. That was irresistible. Since the 1990s, American financial interests had led the charge into China, and the repression in Hong Kong in 2020 did not put them off. Indeed, the fondest hope of Wall Street was to break out of the Hong Kong beachhead defined by “one country, two systems” to gain access to the vast market of mainland China. No one was more explicit about this than Ray Dalio, the legendary founder of Bridgewater Associates, the largest hedge fund in the world, with $160 billion under management. “This ain’t your grandfather’s communism,” he told the viewers of Fox Business news from Davos in January 2020. “Some Chinese like capitalism more than Americans do.” As the year began, Dalio was worried about the mood back home. Bernie Sanders and Elizabeth Warren, running strong in the Democratic primaries, were stirring an “anticapitalist” mood.

And it wasn’t only America’s socialist tendencies that worried Dalio. Even more concerning was the Federal Reserve. Among American moneymen, Dalio is known for his interest in history. After studying the rise and decline of financial empires over the last five hundred years, Dalio was convinced that a fundamental shift was under way. The United States, he warned, was “creating a lot of debt and printing a lot of money, which in history was a threat to reserve currencies.” “The fundamentals are undermining the U.S. dollar.” The conclusion could not be dodged: the future belonged to China. As Dalio remarked somewhat defensively, “People have accused me of being biased, naive, and in some cases unpatriotic. I think I’m just being objective.”

Even with a Cold War in the air, the most remunerative safe haven for capital in 2020 was Chinese sovereign debt. Offering attractive yields several percentage points above those available in the West, China was the new “hard money capital of the world.”

Concerns about “property rights” and “Western values” didn’t figure in this investment decision. The worry was not that the PBoC would bare its communist fangs but that it might turn into the Fed and adopt Western-style quantitative easing (QE).

Commodity producers were if anything even more dependent on China. China was overwhelmingly the largest buyer for internationally traded iron ore and coal. It was the largest source of market growth for oil. And China was not just the biggest buyer. Increasingly, it was making the markets too.

No more than American bankers, European industrialists, or Arab oil producers could they escape the gravitational force of China’s giant growth machine, but they had immediate reason to be concerned about China’s aggressive new stance on the South China Sea and its bullying attitude toward weaker trading partners. China’s new scale could not be reversed. If it were to be, it would be an economic, a social, and likely a political disaster. The question was how to contain, institutionalize, and frame the new balance of power.

The one major Asian economy that was missing from RCEP was India. Between 2014 and 2018 India had knocked China off the podium as the fastest-growing economy in the world. There was excited talk about the new role for India as Asia’s number one.70 Riding that wave of optimism, India had been part of the original RCEP talks with ASEAN, but in November 2019 it opted out.

The year 2020 dealt a savage blow to India’s pretensions to Asian leadership. Delhi’s coronavirus response was botched. Tens of millions were hurled into destitution. India’s economic contraction was among the worst in the world. When Indian and Chinese soldiers clashed in the Himalayas in June, in the worst border violence since 1975, it did not end well for the Indians. Dozens were killed and China ended up in control of 600 square miles of extra territory in the disputed Ladakh region.74 The ensuing patriotic protests led to a boycott of Chinese cell phones and apps like TikTok. But India could not afford a Cold War. For all India’s recent growth, Beijing’s defense budget was almost four times that of India and its economy six times bigger. China’s economic and financial weight was simply too great, and it was making itself felt in India’s immediate vicinity.

By the autumn of 2020, Delhi was shadowed by dark fears of strategic encirclement.75 There was some comfort in the fact that Washington was pushing “the Quad”—the military relationship between the United States, Japan, Australia, and India—but in that company, India was far from being number one.

As Larry Summers, Clinton’s last treasury secretary, put it in 2018: “Can the United States imagine a viable global economic system in 2050 in which its economy is half the size of the world’s largest? Could a political leader acknowledge that reality in a way that permits negotiation over what such a world would look like? While it might be unacceptable to the United States to be so greatly surpassed in economic scale, does it have the means to stop it? Can China be held down without inviting conflict?”78 As Summers suggested, it was all too easy for commercial competition to slide into geopolitical conflict. And the stakes could hardly be higher.

The Trump administration’s declaration of economic war on China was no doubt dismaying for Beijing, but its ramifications spread further. For the United States to be declaring China, the main driver of global growth, to be a national security threat upended one of the basic assumptions of the post–Cold War world. Contrary to the flat-world presumption of globalization, the United States was making the nationality of firms, Chinese or not, fundamental to Washington’s willingness to allow them to access American technology. And though it had acted unilaterally and without warning, America clearly expected suppliers in friendly countries to fall into line. Some did so willingly. Australia was ahead of the U.S. in banning Huawei. The UK had long been monitoring the involvement of Huawei in its telecom network.