Jonathan Faull / Apr 2020
The Covid 19 pandemic is the unforeseen crisis which will test the resilience of the reforms introduced in the wake of the 2017 meltdown in financial markets. The designers of those reforms, led by the Financial Stability Board and the Basel system built around the Bank for International Settlements, consciously created a toolkit for what they hoped would be a distant generation of governments, supervisors and regulators faced with a major international crisis. Barely a decade later, that toolkit and the lessons learned by governments, international institutions and central bankers are being put to the test.
In attempting to answer the question “What could happen?”, I realise that I could be wrong about many things. This is barely the beginning of a major crisis of unknown depth and duration.
Let’s start with financial regulation in the EU and speculate about what might happen. More countries, perhaps including Denmark and Sweden, will join the banking union’s system of bank supervision and resolution. A European deposit insurance scheme will be added to the banking union’s arsenal. State aid rules will be relaxed, with conditions imposed on the financial sector limiting bonuses, dividends and share buybacks. Nationalisations and mergers, both within and between EU countries, will be brought about and nodded (or forced) through. The European Supervisory Authorities will be given more centralised powers of supervision and regulation. Protectionism will be enhanced (exacerbated) by greater control of foreign investment in key economic sectors. Central bank independence will be reined in and Governors will be given more or less explicit political instructions.
The EU will seek to establish the basis of financial sovereignty, exacerbating the split from London already likely as a result of Brexit….. unless the EU-UK negotiations are paused and a constructive relationship is forged by the teams, largely still active in Brussels, London and elsewhere, which worked together effectively in the last crisis. In that case cooperation may win the day after all, at least in the field of financial regulation.
The sustainable reconstruction efforts which will follow the crisis provide a context in which the political relationship between the UK and the EU can be considered and settled in a more mature way than we have seen so far. Wider international issues such as trade, currency and the future of the WTO will also benefit from the application of statesmanship to a broader set of issues. Past models are not always relevant, but Bretton Woods comes to mind.
Meanwhile, power relationships will have been tilted in favour of executives acting with scant regard for checks and balances. Blocked proposals will be dusted off and resubmitted in changed circumstances, not just the crisis, but also the British absence from Brussels decision-making, US nationalism and resurgent Chinese self-confidence. State surveillance of people and places will reach unprecedented levels of intrusion and the temptation not to revert to the status quo ante after the crisis has passed will be strong.
Governments and EU institutions will be tempted to understand the crisis in the light of their pre-existing rhetoric and policy priorities. Lessons will be said to have been learned from the last crisis. No austerity this time, money going to real people and the real economy, not corporate or financial fat cats. Foreigners will be blamed and health systems will be defended and refinanced. Sovereignty will gain yet more adjectives: in addition to strategic, digital and technological, there will be sanitary and health. Relocation (repatriation, reshoring) of business activities will be encouraged as supply chains are reconfigured.
In the EU, the perennial debate about the balance between national and shared European sovereignty will colour arguments about bank rescues, regulation and mergers. Ten years ago, compromises between a free-flowing single market and national control of financial sectors were reached and are likely again to be the outcome of the Brussels process, but this time without British input.
Conservative politicians are adopting the rhetoric and some of the policies of their socialist opponents. With slight rebranding, policies criticised a few weeks ago as extravagant fantasies are being implemented. More tax will be paid by the rich and successful companies, as the debt mountain rises and universal health and old age care stay at the top of political agendas. Banks will argue for loosening of Basel standards, once again claiming that capital requirements get in the way of lending; the morality of short selling, naked or otherwise, will resonate more widely than academic debates about liquidity.
Conservative and environmentalist forces will coalesce as odd anti-global bedfellows. Governments will emerge owning large parts of their economies. Politicians and officials will have got used to directing supply, demand and movement. The European Commission will stress the need for more European integration and the completion of various key projects such as management of the euro, a joint eurozone bond, banking union and Schengen. Resentment in southern Europe about the lack of human and financial solidarity in the north will exacerbate similar feelings already caused by the migration crisis. EU (and German) leadership will be needed to find a way through. A possible consequence is a swing to the hard right in key countries north and south, which will make the politics of reconstruction even more toxic.
The British Government will emphasise its independent margins of manoeuvre outside the EU, while continuing to cooperate with its allies, and the US will ratchet up isolationist rhetoric. A lot will be said and written about the end of the global era, bringing together coalitions of nativist and green forces. Some will say that this was a seismic event and life will never be the same again. Others will observe a splurge when normal life resumes (face-to-face meetings, handshakes, kisses, travel, restaurants, live sport and entertainment) and conclude that global hedonism and inequality are back and here to stay. A new equilibrium will emerge and the short 21st century will begin.
 To name but a few: Barnier, Berrigan, Buti, Calviño, Cunliffe, Guersent, Scholar, albeit in some cases in different locations and positions.