The Week in COVID-19 and Economic Diplomacy: 'Worsening Global Projections'

Our weekly COVID-19 and Economic Diplomacy tracker looks at policies that impact the coordination of international governments and central banks, ongoing commentary and analysis, and asks what these turbulent times mean for economic diplomacy. 

We’d love to hear what you think. Send us your comments, and be sure to follow us on Twitter @BelferEDI.

The Highlights

• The U.S. withdraws from the WHO and threatens to deport international students if universities are fully online. Debates about the most effective stimulus policies continue as the country surpasses 3 million coronavirus cases. 
   
• The EU has slashed expectations of growth, projecting that the economy will contract 8.3 percent instead of the previously estimated contraction of 7.4 percent. Meanwhile, the OECD projects that advanced economies’ unemployment rates will reach 9.4 percent by the end of the year.
   
• Developing economies may owe less debt to China than previously thought. And Argentina is undertaking one of the largest debt restructurings in the history of emerging markets.

U.S. Developments

As coronavirus cases continue to surge throughout the United States, the Trump administration recently announced it had begun the process to withdraw from the World Health Organization. The United States has struggled to respond to the pandemic as states balance economic recovery against health risks. 

• The White House has announced it has begun the process to withdraw from the World Health Organization. The move raises concerns over the agency’s ability to respond to the ongoing pandemic and future public health challenges, as the U.S. contributes over 20% of the WHO’s budget. 
   
• The administration also issued a directive that international students enrolled at universities providing only online instruction would not receive a U.S. visa. Harvard and MIT have filed a suit against the administration which seeks a temporary restraining order and injunction.
   
• The nation’s biggest banks have not signed up to the Federal Reserve’s midsize business lending program. The so-called Main Street program is the first time the Fed has attempted to aid midsize businesses. Banks state that there has been little interest due to onerous reporting requirements. Unlike the Paycheck Protection Program (PPP) aimed at small businesses, Main Street loans are not forgivable.
   
• Newly released data on the PPP shows that loans were issued to lobbyists, law firms, businesses owned by members of Congress, and personal friends of the President. The administration released the list of businesses which received loans of more than $150,000, but 86.5 percent of PPP loans were for less than that amount. Roger Altman writes an op-ed for The Washington Post that PPP isn’t helping businesses and instead states should use low-interest, long-term loans for microbusiness. 
   
• Wall Street Journal reporter Kate Davidson states that some economists and U.S. lawmakers propose putting the stimulus on autopilot, tying the amount of unemployment benefits to the unemployment rate. Some Democrats argue for strengthening automatic stabilizers at a time when the Federal Reserve’s ability to cushion the economy is weakened as interest rates are close to zero. Republicans are unlikely to support such a proposal with critics stating that enhanced benefits discourage people from reentering the workforce.
   
• Raphael Bostic, president of the Federal Reserve Bank of Atlanta, published an essay on how the central bank is grappling with racial and economic inequality. In an interview with The Wall Street Journal, he discusses his perspective on the intersection of racism and economic equality and his reflections on being the first Black Fed president.
   
• Gavyn Davies of The Financial Times argues that the structural damage to the U.S. labor market is unlikely to be fixed quickly. Instead of the government implementing stimulus to demand via tax cuts on consumer spending, it should spend that money on protecting low-income households and encourage workers to transition to expanding sectors.
   
• In the latest issue of Foreign Affairs, Francis Fukuyama argues that effective governance underlies the global political order. The pandemic could lead to the U.S. decline, the dismantling of the liberal international order, and a resurgence of fascism. Conversely, it could lead to the revitalization of liberal democracy. 
   
• Robert Lighthizer opines, also in Foreign Affairs, that the pandemic could lead to a reimagining of U.S. trade policy that supports the kind of society we want to live in. He cites a market-distorting capitalist China and a dysfunctional WTO as major challenges for U.S. policy. To confront these challenges, he argues that the U.S. must find a balance between the openness of the 1990s and the barriers of the 1930s. Sensible trade policy should strike a balance between economic security, economic efficiency, and the needs of workers.
   
• Jason Furman, a Harvard Kennedy School professor, writes for PIIE that the future of the labor market depends on the virus’ trajectory and how quickly unemployed people can return to their jobs. Bruce Shneier, a fellow at the Belfer Center, argues in Quartz that the U.S. should embrace inefficiency, and that the drive for efficiency has led to systems that are unable to respond to crises. The type of inefficiency is dependent on the system and varies from redundancy to diversity to overcapacity.

European Developments

As the July 17-18 summit of leaders to discuss the European recovery fund approaches, the European Union has slashed its projections for economic growth. While some nations hard hit by the pandemic have agreed to accept certain conditions in order to receive funds from the EU, others have bristled against them.

• The European Commission has slashed its growth forecasts for the EU economy, from a previously forecasted drop of 7.4 percent to 8.3 percent. The assessment does not account for a second wave of coronavirus cases. A slower than expected reopening for economies and the reintroduction of localized lockdowns caused the projected decrease.This lends more urgency and pressure for European leaders to agree on a €750bn recovery fund, especially as some European countries are growing much faster than others.
   
• The Budesbank, Germany’s central bank, will purchase sovereign bonds beginning next month. The German constitutional court had previously ruled that the Budesbank must stop buying bonds unless the government had conducted a “proportionality assessment” and fully analyzed the impact of the ECB’s asset purchases. This alleviates some of the uncertainty surrounding one of the main policy tools of the ECB to manage the economic fallout from the pandemic. 
   
• The OECD projects that advanced economies’ unemployment rates will reach 9.4 percent by the end of the year and will not return to pre-pandemic levels until 2022 at the earliest. A jobless rate of 9.4 percent is the highest since the Great Depression. The OECD warns that a second wave of coronavirus cases could send the unemployment soaring to 12.6 percent. The research institute warns that countries should not prematurely end crisis measures and launch new programs to support employment. 
   
• The U.K. announced a $38 billion stimulus package, the second phase of government spending and tax cuts. However, the package is smaller than the one announced by Germany. The Financial Times editorial board characterize the plan as a “stopgap” and that the package depends on “a lot going right.” 
   
• The Financial Times conducted interviews with Christine Lagarde, on how the ECB is responding to the crisis, and Kyriakos Mitsotakis, prime minister of Greece, who stated that Greece will not accept strict conditionalities associated with the potential €750bn recovery fund.

Emerging Markets

• The World Bank has decided not to pursue a second sale of pandemic bonds. Created three years ago to help developing countries respond to infectious disease outbreaks, the pandemic emergency financing facility (PEF) has been criticized for being “too little, too late” during the current crisis. A major criticism of the program is that it prioritizes private sector investors over global health.
   
• The Economist reports that the developing economies of the G20 initiative owe less to China than previously thought. Though Beijing lends more than all of the Paris Club lenders combined, China holds 20 percent of total foreign debt, which is smaller than the previous estimate of over 25 percent. Possible explanations for this discrepancy include a difference in announcements and actual disbursements; also, the World Bank excludes some debt owed by state-owned enterprises and special-purpose vehicles but not guaranteed by the government. 
   
• Mohamed A. El-Erian writes in an op-ed for Bloomberg that negotiations between Argentina and the IMF could “anchor one of the largest sovereign debt restructurings in the history of emerging markets.” Megan Greene, senior fellow at the Harvard Kennedy School, argues in The Financial Times that investors are too complacent about emerging market risks. 
   
• The Financial Times interviewed several people from developing countries on how the pandemic and economic fallout have affected them. 

Odds and Ends

• The Financial Times has started a new series examining how the pandemic has exacerbated the weaknesses of the political, societal, and economic models globally.The series focuses on a fundamental rethink of our societies and the potential solutions and ideas for a post Covid-19 future. The first in the series is by Martin Wolf on citizenship and democracy in a post-COVID-19 era.
   
• A group of 156 economists signed a letter calling for the U.S. to provide direct cash payments to the American people until the economy shows recovery.
   
• Harriet Torry writes for The Wall Street Journal on how Latino workers are particularly hard hit as the service industry leads the U.S. recession.