Opinion

Uncoordinated policies behind market collapse

Underlying issues, and not just the coronavirus panic, fed the recent meltdown

By: Date: March 10, 2020 Topic: Global Economics & Governance

After more than a month of horrible news on the Covid-19 coronavirus outbreak, first in China and then globally, the markets have finally abdicated.

For the whole of February, markets had managed to endure the first ups and downs, especially outside China. To begin with, the area of ​​contagion was expected to remain limited to China or, at best, to the rest of Asia. In addition, once it was understood that the impact on the Chinese economy was going to be very negative, the markets came up with the hope of a great stimulus plan to be carried out by Beijing, which filled them with bliss, to the point of recovering all of the losses that had accumulated since the epidemic began in Wuhan.

For too long, investors continued to turn a deaf ear to the announcements by a large number of companies that their sourcing from China would suffer delays and disruptions. Investors had to wait for a company as big as Apple to announce a profit warning due to disruptions in its supply chain to realize what was happening and experience a market correction, although still moderate compared with what we have experienced during the past week.

The trigger for the most recent market nightmare was the sudden increase in the number of infections in Europe and the US, which convinced investors we are now dealing with a global shock. The 50-basis-point interest-rate cut by the US Federal Reserve only proved the point.

There were good reasons for a cut, from fear that the dollar would become a true safe-haven currency during President Donald Trump’s pre-election campaign to possible liquidity problems in some financial institutions, to the fear of a coronavirus-induced recession in the US economy. What is clear by now is that the market considered the Fed’s cut more as a snack than a dessert, as expectations of further cuts have been built all the way to 75 basis points or more.

The carnage that took place in financial markets on Monday, starting with oil and energy companies and followed by a sharp stock-market correction and the rally in US Treasury yields, is explained not only by the Covid-19 epidemic but by what is behind it. The interesting thing is that “what’s behind” the epidemic is not the same as what led to the market collapse in 2008.

In 2008, the origin was the strong indebtedness of American households promoted by permissive banks that lacked the capital needed to take on so much risk. Today, American households are not as leveraged and banks are better capitalized. So why this collapse?

The reality is that since Trump came to power, isolated problems have become global but solutions are more local than ever. Policy coordination at the international level has never been more difficult even for problems for which coordination is essential, like a pandemic. This is obviously also true for oil, whose supply has been coordinated through the Organization of the Petroleum Exporting Countries (OPEC) for decades.

In short, the market has broken down because it fears a world that cannot achieve coordination even when facing big challenges. We should take note that this is not only China’s fault.

If we are lucky, the Fed might manage to coordinate its next cuts with the European Central Bank and the Bank of Japan, but for now it is clearly being pushed by the market and falling behind the curve.

Not the best way to boost confidence.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read article More on this topic More by this author
 

Blog Post

COVID-19: The self-employed are hardest hit and least supported

Self-employed workers are hardest-hit by COVID-19 lockdowns. Yet they often receive less government support than salaried employees. Is the disparity justified?

By: Julia Anderson Topic: European Macroeconomics & Governance Date: April 8, 2020
Read article More on this topic
 

Opinion

Disease, like poverty, does not stay at home

To fight the Covid-19 pandemic, best practice responses in Africa need to be implemented around international collaboration. These include the need to activate emergency operations centres, to establish a surge capacity in health systems, and to mitigate the economic and social consequences of the pandemic.

By: Yonas Adeto, Karim El Aynaoui, Thomas Gomart, Paolo Magri, Greg Mills, Karin von Hippel and Guntram B. Wolff Topic: Global Economics & Governance Date: April 8, 2020
Read about event More on this topic
 

Past Event

Past Event

POSTPONED: The Sound of Economics Live: Can the Eurogroup save the day?

In this episode of The Sound of Economics, we analyse the Eurogroup's 'rescue plan' amidst the economic fallout brought about by the COVID-19 health crisis.

Speakers: Maria Demertzis, Giuseppe Porcaro, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 8, 2020
Read article More on this topic More by this author
 

Blog Post

Social distancing: did individuals act before governments?

Using online searches for restaurants as a proxy to assess whether and to what extent individuals were practicing social distancing before strict lockdown measures, we identify substantial differences between countries. In some countries, including Denmark and Portugal, searches for restaurants were considerably down before restaurant restrictions were put in place. Countries where social distancing started earlier, regardless of when policies were enacted, can expect a flatter coronavirus curve.

By: Catarina Midões Topic: European Macroeconomics & Governance Date: April 7, 2020
Read article More on this topic More by this author
 

Blog Post

A green recovery

Government policy faces various challenges. Before the COVID-19 outbreak, the European Union set ambitious targets to reduce carbon emissions. Now in the midst of the pandemic, the EU has temporarily lifted state-aid rules allowing governments to steer companies through the crisis and to minimise job losses using public money. This column suggests combining these policies by attaching green conditions to state aid. In that way, we can aim for a green recovery.

By: Dirk Schoenmaker Topic: Energy & Climate Date: April 6, 2020
Read about event More on this topic
 

Past Event

Past Event

A European response to the coronavirus crisis with Paolo Gentiloni

This is the second event in our series with the Financial Times, where Paolo Gentiloni will discuss the European response to the coronavirus crisis.

Speakers: Paolo Gentiloni, Mehreen Khan and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 6, 2020
Read article More on this topic
 

Opinion

A European approach to fund the coronavirus cost is in the interest of all

We had not seen a common challenge as clear as this pandemic. The sum of national actions and programs is likely to be insufficient.

By: Agnès Bénassy-Quéré, Arnoud Boot, Elena Carletti, Jan Krahnen, Miguel Otero-Iglesias, Lucrezia Reichlin, Dirk Schoenmaker and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: April 6, 2020
Read about event More on this topic
 

Upcoming Event

Apr
21
13:00

The role of Cohesion policy in the fight against COVID-19 with Elisa Ferreira

How can cohesion funds help the National, regional and local communities that are on the frontline in countering the coronavirus and the resulting economic crisis.

Speakers: Jim Brunsden, Maria Demertzis and Elisa Ferreira Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author
 

Podcast

Podcast

Mythbusters: debunking economic myths

Economics seems to be full of myths that are hard to debunk. Will robots take our jobs? Are trade deficits bad? Is China such a big economy simply because of the size of its population? This week, Nicholas Barrett, Maria Demertzis, Marta Domínguez-Jímenez and Niclas Poitiers put on the detective cap and become Bruegel's own economic mythbusters.

By: The Sound of Economics Topic: Global Economics & Governance Date: April 3, 2020
Read article More on this topic More by this author
 

Opinion

A temporary, common fiscal stimulus to answer the mayhem of COVID-19

We are not in normal times and we have to surpass, albeit only for the duration of the COVID-19 shock, the hurdles that did not allow the euro-area to endow itself of a common fiscal policy.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: April 2, 2020
Read about event More on this topic
 

Past Event

Past Event

Find my virus: Mobilising AI and big data to fight COVID-19

At this event, the panellists will discuss the role of AI and big data in the fight against the coronavirus crisis.

Speakers: J. Scott Marcus, Alex Sandy Pentland, Georgios Petropoulos and Marietje Schaake Topic: Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 2, 2020
Read about event More on this topic
 

Upcoming Event

Apr
28
18:00

The Sound of Economics Live: On emerging market crisis with Barry Eichengreen

At this online podcast recording, Guntram Wolff and Barry Eichengreen will discuss the impact of the COVID-19 crisis on emerging economies and the corresponding policy responses.

Speakers: Barry Eichengreen, Giuseppe Porcaro and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Load more posts