Global macroeconomic cooperation in response to the Covid-19 pandemic

The Covid crisis has caused the greatest collapse in economic activity since 1720. Some advanced countries have mounted a massive fiscal response, both to pay for disease-fighting action and to preserve the incomes of firms and workers until the economic recovery is underway.

But there are many emerging market economies which have been be prevented from doing what is needed by their high existing levels of public debt and - especially - by the external financial constraints which they face.

Professor David Vines, Professor of Economics at INET Oxford, discusses that there is a need for international cooperation to allow such countries to undertake the kind of massive fiscal response that all countries now need, and that many advanced countries have been able to carry out. So far such cooperation has been notably lacking; the contrast with what happened in the wake of the global financial crisis in 2008 is very striking.

The necessary cooperation needs to be led by the Group of Twenty, or G20, just as happened in 2008-9 since the G20 brings together the leaders of the world’s most important economies. This cooperation must also involve a promise of international financial support from the International Monetary Fund since otherwise international financial markets might take fright at the large budget deficits and current account deficits which will emerge, creating fiscal crises and currency crises and so causing such expansionary policies which need to be brought to an end.