Anything written here about the financial policy response to COVID-19 will be out of date by the time you are reading it – we are in entirely new territory.
The crisis has many aspects. But as far as finance is concerned, in the last week, on top of major stabilisation efforts many governments are now putting in place a range of measures, including distribution of money, to provide economic relief and it is likely that much more is to come.
As a few examples of the dramatic actions we have seen in recent days:
- Governments around the world including Indonesia, the United Arab Emirates, Iran and Malaysia scrambled to announce large domestic stimulus packages which typically included a blend of measures to support liquidity combined with direct support for affected companies and citizens;
- At time of writing the US government has secured bipartisan agreement on a stimulus deal of nearly $2tn. Meanwhile the US Federal Reserve has announced that it will buy unlimited Treasury bonds and mortgage-backed securities;
- The European Central Bank committed to provide €1 trillion of quantitative easing in 2020, complementing a comprehensive pack of measures by the European Commission which includes triggering special mechanisms to allow the usual fiscal rules to be bypassed by Member States.
China is several weeks ahead of the rest of the world in its experience of the financial and economic impacts of the virus. The Politburo Standing Committee has called for China to “tackle the epidemic with one hand and develop the economy with the other”, with the country looking to inject an anticipated $7 trillion into the economy. Some recent reports have suggested that China risks taking backward steps in climate terms, for example loosening restrictions on local permits for coal plans and considering weakening vehicle emissions standards.
Both for China, and for Europe with its flagship Green Deal agenda and its taxonomy of sustainable economic activities, it will be important to provide economic stimulus measures that do not undermine hard-won policy achievements. It is very hard in the middle of a crisis, but we must keep our eyes on the longer term. The recovery phase that will follow the current period of rapid action will be an extraordinary opportunity for the world to put large-scale finance into building the future economy that we want and need.
The response to the financial crisis of 2008 was seen by some as a missed opportunity to invest sustainably, but this time around both the policy context and the nature of the crisis are very different. Between near-zero interest rates and the real economy impacts of the virus, governments will have every incentive to take different types of action and stimulate growth by investing in the industries and infrastructure of the future.
2020 was always planned as the run-up to the COP26 talks in the UK (although it is possible that these may now need to take place in 2021, the same year as the UK’s G7 Presidency). The UK’s finance-related priorities for COP26 include securing international consensus on measures to address risk, reporting and – crucial for the recovery period – return. On the risk side it will be important to ensure that the lessons this current virus brings us in relation to systemic financial risk – which include cascading risks through the real economy, and interdependence of national supply chains - are not lost in relation to potential future risk from climate change.
The UK’s COP26 priorities also include a strong focus on development finance institutions and public banks. These institutions will have a vital role to play in providing countercyclical investment and supporting recovery efforts in vulnerable and damaged economies. Emerging markets are now experiencing a ‘sudden stop’ in investment flows from abroad and this will restrict the financial decision-making ability of their governments. Going forward they will need economic recovery plans that have the potential to be both green and equitable.
The UK’s final priority – innovative finance – is also an area likely to receive attention in a changing financial landscape. At present eyes are on the World Bank’s pandemic bonds, created only three years ago, and whether they will pay out to affected countries in a timely and useful way. There will be lessons to be learned for the design of new financial products designed to deal with climate resilience and disaster risk, many of which are also often novel and untested.
Finance ministers bear a heavy responsibility. Now, as they react rapidly to economic damage and market turbulence, these lonely decision-makers are faced with new challenges and are taking bold decisions. Soon, they will also take a leading role in stimulating growth and in guiding the recovery of national economies. Citizens who have been hit by the financial and economic impacts of the virus will expect to see improvement to their circumstances and those of their children.
So far in the financial response to the virus crisis we are seeing governments act, if not in unity, then with high awareness of how their actions reflect and affect the positions and decisions of other countries. Forums through which finance ministers can work together for a common goal, such as the G7, G20 and the Coalition of Finance Ministers for Climate Action, are more important than ever. As Gordon Brown has pointed out, ‘an ideology of “everyone for himself” will not work when the health of each of us depends so unavoidably on the health of all of us.’
In coming weeks E3G will develop and support new thinking about the next phases of the crisis. How can we ensure that the recovery effort is just and sustainable? What do the unique aspects of this crisis, compared to those which have happened in the past, mean for the solutions we need?
As a start on this thinking, we are pleased to share the outcome document from a recent conference E3G chaired on this topic. From October 16–18, 2019, the Stanley Center for Peace and Security gathered participants at the Airlie Center outside of Washington, DC, for the 60th annual Strategy for Peace Conference. In the roundtable “The Next Global Financial Crisis and Climate Change: A Policy Agenda to Align with the Paris Agreement,” participants examined the complex relationship between the financial system and the threat of climate change and identified which aspects of the regulatory and economic framework must change to deliver a climate-safe world.
We look forward to sharing the results of our work with you as it progresses, and to helping to build a safe, healthy and sustainable economy for the future.