ChapterPDF Available

Global Economy in the COVID-19 Era. The Impact of the Pandemic on the Economic and Financial Systems

Authors:
Proceedings of the 4th International Conference on Economics and Social Sciences (2021), ISSN 2704-6524, pp. 28-35
The 4th International Conference on Economics and Social Sciences
Resilience and economic intelligence through digitalization
and big data analytics
June 10-11, 2021
Bucharest University of Economic Studies, Romania
Global Economy in the COVID-19 Era.
The Impact of the Pandemic
on the Economic and Financial Systems
Narciz BĂLĂȘOIU1
DOI: 10.2478/9788366675704-004
Abstract
The transition from pandemic shock and adaptation to the new normal was gradual,
affecting the social, political, but especially the economic spectrum. The global business was
the first to adapt to the new situation and operate in a new paradigm. The spread of
COVID-19 in the first part of 2020 affected all emerging markets, although some of them
show more economic resilience than others. The impact has been determined or influenced
by the form and magnitude of fiscal and monetary incentives, as well as the health systems
efficiency. We are witnessing the emergence of obstacles to the free flow of capital, labour
and trade. We are also witnessing a relocation of supply chains, a different complexity of
US-China trade tensions and an increased risk of public debt among cloistered markets,
resulting in an increased risk of default on sovereign debt.
Keywords: pandemic, economic crisis, financial risk, supply chains, systemic
transformation.
JEL Classification: F01, E44.
1. Introduction
The pandemic started at the end of 2019 with the evolution of a new strain of
coronavirus. At the social level, it is obvious that the shock of March and April 2020
was felt by the citizens of all states around the world, who not only seem to be
accustomed to the idea of a pandemic, but also accepted the fact that they will have
to live with the virus for a long time.
The transition from pandemic shock and adaptation to the new normal was
gradual, perpetuating the social and political spectrum, and especially the economic
one. The global business was the first that had to adapt to the new situation and
operate in a new paradigm (Battistini, Stoevsky, 2021).
1 Bucharest University of Economic Studies, Bucharest, Romania, narciz.balasoiu@rei.ase.ro.
© 2021 N. Bălășoiu, published by Sciendo. This work is licensed under the Creative Commons Attribution 4.0
License. 28
Proceedings of the 4th International Conference on Economics and Social Sciences (2021), ISSN 2704-6524, pp. 28-35
29
At the same time, politicians have also adapted to the new pandemic context, and
the coronavirus has become a favourite subject of electoral rhetoric. The
responsibility or irresponsibility of some of the decision-makers influenced both the
infection curve and the economic contraction. But the most important factor in this
transformation was the perception and reaction of public opinion.
COVID-19 was certainly a “black swan” that no analyst, no matter how skilled
in his field, could predict. And even if one did foresee it, no one could anticipate the
profound impact it had on all the social, political and economic corners. It is also
obvious that this “black swan” has determined (Pramod, 2021), at least in the short
term, a new global order and paradigm, which will determine social, political,
geopolitical and economic relations. Globalization, an extremely popular
phenomenon in recent decades, was one of the first victims of the pandemic. Critics
of globalization were active for several years now and gained a boost in 2020. The
pandemic and the measures taken by national or regional authorities raised new
questions about nationalism and cooperation with large implications over economic
and financial systems.
2. Problem Statement
For many analysts, the reactions of nationalist isolation since the beginning of the
pandemic have been a wake-up call to how a withdrawal from multilateralism would
threaten the global capacity to take action against the pressing risks facing the world.
The COVID-19 pandemic has shown us that individual well-being is more
recently intrinsically linked to the well-being of an individual on the other side of
the globe. A virus in one of the many markets of a Chinese city has turned into a
global pandemic in just three months. Therefore, governments need to ensure that
beyond political resentment, they are able to implement processes that allow for the
exchange of information and good practice. At the same time, they must protect the
personal data of individuals, which is a great challenge for the future.
China’s role in the future configuration of the international system has been
strongly influenced by the pandemic. Throughout the crisis, China has set out to play
a more prominent role, thus trying to hide its role in triggering the disaster. In recent
months, there have been several attempts at cooperation between China and a
number of states, whether we are talking about critical equipment, medical
collaboration, or the exchange of experience. The Chinese economy appears to be
recovering faster than the rest of the economies, so Beijing will play an important
role, not only as an anchor for demand for raw materials, but especially as an anchor
for liquidity for emerging economies and developing countries. However, China will
have to play a positive role in multilateral cooperation formats in order to
successfully establish itself as a major power.
The pandemic is likely to play a significantly different role for another major
power in the international system. Preliminary data suggest that we will witness a
relative decline of the United States and other states’ desire to align with Washington
on economic issues. At the same time, Brexit and the approach of the future US
administration have the capacity to influence the future of globalization.
Proceedings of the 4th International Conference on Economics and Social Sciences (2021), ISSN 2704-6524, pp. 28-35
30
Technological and cyber partnerships will be very different from geographical
partnerships and will relate differently to economic partnerships.
3. Literature review
The spread of COVID-19 was expected to slow the global economy. According
to preliminary forecasts of the International Monetary Fund (2020a), the global
economy will contract by at least 3 percent. The contraction is expected to reach a
higher pace than the 2008-2009 crisis. The report cites a number of reasons for such
a development: (i) maintaining social distance with the same perseverance;
(ii) significantly low activity during lockdown periods; (iii) very low productivity of
companies trying to operate under lockdown conditions.
The economic situation during the pandemic as well as the response of
governments have been a concern for many research centres and institutions. The
developments are also confirmed by the National Bureau of Economic Research
(NBER) in the United States, which in an analysis conducted in mid-2020 reveals
the growing interest among profile publications to assess the economic situation
generated by the pandemic. Also, a number of 60 publications were launched
between March and May 2020 by IZA - Institute of Labour Economics, Germany.
Figure 1. Index NBER on COVID-19 economic publications
(March May 2020)
Source: Created by authors.
4. Research methods
The problems analysed in this research are both pressing and topical, therefore
the international experts and academics are making important efforts to keep up the
research closely connected to the dynamics of pandemic-related issues. For this
Proceedings of the 4th International Conference on Economics and Social Sciences (2021), ISSN 2704-6524, pp. 28-35
31
paper I have used the deductive method, while corroborating public data and
information provided by European institutions, European Central Bank, World
Bank, US government, rating institutions, official reports and reputable research
centres.
At the same time, the research represents a qualitative (synoptic) analysis
regarding the authorities' reaction to the COVID-19 pandemic, in order to see to what
extent the promptness and the trans-regional cooperation ensured an optimal
response. The research also aims to highlight the degree to which inappropriate
political decisions on one aside, and intrinsic response actions related to the
dynamics of international markets, on the other side, have significantly contributed
to the alteration of different economic and financial processes.
5. Findings
5.1 The economy at the confluence of the pandemic with politics
The spreading of COVID-19 in the first part of 2020 affected all emerging
markets, although some of them have shown more economic resilience than others.
It comes in different forms and has been determined or influenced by the form and
magnitude of fiscal and monetary incentives, as well as by the different quality of
the health systems.
The impact of the pandemic on emerging market businesses is major: we are
witnessing the resurgence of obstacles to the free flow of capital, labour, and trade.
We are also witnessing a relocation of supply chains, a different reaction to the
US-China trade tensions, and an increased risk of public debt among border markets,
resulting in an increased risk of default on sovereign debt (Herrera, Konradt, 2020).
It is extremely possible that the sovereign debt default will become more likely,
despite the G20 moratorium on interest rates on these debts. Rating agencies threaten
to downgrade the rating of those states that do not accept the moratorium on the
grounds that taking into account debts to private creditors will increase the overall
credit risk (Correia, Luck and Verner, 2020).
If we turn our attention to the individual states that can cause chain reactions, we
see that Zambia, Ecuador, or Laos have begun the first steps towards debt
restructuring. At the same time, countries such as Senegal and Mongolia, both at risk
of accumulating more debt in 2021, will pose a significant risk starting in the last
quarter of this year. At the same time, Nigeria, Angola, Tunisia, and Libya are also
at risk (Jones, 2020), due to an additional shock on top of the pandemic generated by
the dramatic drop in oil prices (See Figure 2).
Specialists expect a slower and longer-term recovery of the emerging markets. At
the same time, any scenario is based on the expectation that the second wave of
COVID-19 infections in the second half of 2021 will create less damage than the
first, as governments and healthcare institutions become more experienced in
managing the pandemic and its effects. According to current data and the assumption
that the existing trend will continue, Asia will have the fastest recovery due to the
faster onset of the pandemic in this region and more efficient institutions in general.
Proceedings of the 4th International Conference on Economics and Social Sciences (2021), ISSN 2704-6524, pp. 28-35
32
Latin America, on the other hand, is at the other end of the spectrum and expects a
slow and difficult recovery due to the poor health care systems and the inadequate
response to the pandemic.
In Europe, only one country is at a higher risk in the second half than in the first
half of the year. North Macedonia is in a difficult situation due to political disputes.
A significant increase in COVID cases last summer has led to massive protests
against the apparent Government’s mismanagement of the pandemic. The
Macedonian parliament recently approved a new governing coalition, after more
than a month of political vacuum in the midst of a pandemic.
Figure 2. Oil price evolution during pandemic crisis (USD/barrel)
Source: World Bank oil market overview.
5.2. The impact on foreign exchange markets
The US dollar has suffered the sharpest decline in trading since January 2018.
The declining dollar reflects both recent concerns about the potential path to US
economic recovery (Garcia-Herrero, 2020), and concerns about the political
response to the rise in the number of cases, mainly accentuated by the last elections.
Regardless of the causes, this decline must be seen in the context of the pandemic,
political changes, and changing paradigm of the global economy. We must not forget
that before the pandemic, the dollar appreciated by more than 30% in nominal terms
since 2011.
The explanation for the depreciation of the dollar may come from the fact that
many emerging market currencies have lost extremely much during this period. The
long-term question is actually different, namely whether the depreciation of these
Proceedings of the 4th International Conference on Economics and Social Sciences (2021), ISSN 2704-6524, pp. 28-35
33
currencies will be stopped, at least to a certain extent, in order to support those fragile
economic activities of these economies (Dahlhaus and Lam, 2019).
Another important question is, if the depreciation of the dollar continues
(especially if it persists or even worsens), what will be the economic and political
consequences for the emerging states in this case. Current data and economic studies
radiographing currency fluctuations and currency exchange show that any short-term
gains from the weakening of non-dollar currencies are at most limited. This is
especially true in the case of emerging markets.
Figure 3. US dollar Index Evolution in pandemic context (USD Index/EOD is settled
against six component currencies: Euro, Japanese yen, British pound, Canadian dollar,
Swedish krona and Swiss franc)
Source: JP Morgan Asset Management statistics (April 2021).
Indeed, instead of using domestic currencies for transactions (local or
international), companies in the above-mentioned economies prefer to invoice
exports and imports in foreign currencies. The dollar is chosen according to the
trading patterns in the region (Putnam, 2020). This new trading pattern leads to what
could be a new paradigm for understanding the fluctuations of currencies and
exchange markets, as well as economic activities. In the coming years, based on the
return of economies to the new normal and businesses adapted to the post-pandemic
context, we will be able to see which will become the dominant currency for
invoicing and for foreign direct investments.
An important implication of the increase in invoicing in US dollar would translate
into a strengthening of the US currency, which may cause a contraction effect on
trade, meaning the opposite of the effect expected by traditionalist theory. If we look
Proceedings of the 4th International Conference on Economics and Social Sciences (2021), ISSN 2704-6524, pp. 28-35
34
at the broader spectrum of exchange rates and how they fluctuate and impact the real
economy, it is primarily determined by the way in which companies set their prices
in domestic currency. So every time domestic currencies are weakened, the goods
and services produced in that economy become cheaper for foreign trading partners.
On the other hand, cheaper prices translate into weaker domestic currency and
higher export demand. And, as the economy operates on the basis of supply and
demand, the whole phenomenon causes an increase in exports.
Conversely, when a currency depreciates, imports become more expensive in
terms of domestic currency, inducing local consumers to import less, substituting as
much as possible the purchase of goods and services from abroad with locally
produced goods.
Following the same traditionalist rhetoric, we can see how a weaker currency can
support the domestic economy by facilitating the growth of net trade. The growth
comes following as a double-edged sword, both by inhibiting imports and,
especially, by promoting exports. Of course, this is to some extent a reductionist
approach, without taking into account the root cause of the weakening of the
currency and ignoring the likelihood that the momentum of domestic spending will
be fully offset by the damage sustained by the purchasing power caused by the
exchange rate effect on inflation. Especially since the impact on the exchange rate
can come from several sources, particularly from the existing tensions in the political
spectrum.
6. Conclusions
The traditionalist approach needs to be rethought since academic studies and data
analysis reveal shortcomings. The first element that shows inconsistency is how most
global trade is invoiced in a few international currencies, especially in US dollars,
(the euro is also on the rise) and not in domestic currencies. As the studies show, the
global economic shock is likely to generate both crises and opportunities for certain
global players. China is challenging the United States so that petrodollars are no
longer a force, while China is trying to speculate as much as possible on the
vulnerability of other players on the global stage to maximize its gains and
dominance.
From a financial point of view, the in-depth analysis of the US dollar and Euro
dynamics shows three obvious trends that seem to continue at least in the medium
term, if not on the long run also. First, the dollar and the euro are increasingly used
for billing, even though the share of global trade for the dollar and the euro has
declined. Second, the euro is used as a trade currency in parts of Africa. Last but not
least, US dollar or euro invoicing states tend to experience a higher exchange rate
between their domestic currency and the euro/dollar in terms of import prices.
These exchange rate fluctuations affect the sensitivity of trade volumes. It also
appears that the increasing use of the euro has initially reduced the dominance of the
dollar globally, while other reserve currencies are playing an increasingly limited
role. The dollar depreciation hypothesis is gaining momentum, and the phenomenon
Proceedings of the 4th International Conference on Economics and Social Sciences (2021), ISSN 2704-6524, pp. 28-35
35
is not purely contextual, so the pandemic has done nothing but accelerate a trend that
studies have shown some time before the onset of this health crisis.
When it comes to assessing the broader picture, beyond the current emotions
fuelled by the worrying number of daily infections and analysing based on existing
empirical evidence, as well as conservative estimates of short-term developments, it
can be inferred that the short term economic and political situation is still quite stable
and predictable. The danger of a deeper crisis is not completely overcome, but the
current financial data reveal a situation that may allow a return to a positive dynamic.
References
[1] Battistini, N., Stoevsky, G. (2021). The impact of containment measures across sectors
and countries during the COVID-19 pandemic. European Central Bank Bulletin, Issue
2/2021.
[2] Correia, S., Luck, S. and Verner, E. (2020). Pandemics Depress the Economy, Public
Health Interventions Do Not: Evidence from the 1918 Flu. Mimeo. Available at
https://ssrn.com/abstract=3561560.
[3] Dahlhaus, T. and Lam, A. (2019). Assessing Vulnerabilities in Emerging Market
Economies. Staff Discussion Paper 2018-03, Bank of Canada, Ottawa.
[4] Garcia-Herrero, A. (Oct. 2020). The pandemic will structurally change the global
economy more than we think. Global Economics & Governance, Bruegel Research
Institute. https://www.bruegel.org/2020/10/the-pandemic-will-structurally-change-the-
global-economy-more-than-we-think/.
[5] Herrera, H., Konradt, M. (2020). The political consequences of the COVID pandemic.
The Centre for Economic Policy Research Analysis, London. Accessed at https://
voxeu.org/article/political-consequences-covid-pandemic.
[6] Institute of International Finance (2020), IIF Statement Following the Conclusion of the
G20 Finance Ministers and Central Bank Governors Virtual Meeting, https://www.
iif.com/Press/View/ID/3856/IIF-Statement-Following-the-Conclusion-of-the-G20-Finan
ce-Ministers-and-Central-Bank-Governors-Virtual-Meeting.
[7] Jones, M. (2020). Oil slump scalps Nigeria, Angola, Mexico ratings; Saudi and Russia
spared. Reuters media agency. Accessed at https://www.reuters.com/article/us-ratings-
oil-s-p/oil-slump-scalps-nigeria-angola-mexico-ratings-saudi-and-russia-spared-
idUSKBN21D3TS.
[8] OECD (2020). A “debt standstill” for the poorest countries: How much is at stake? OECD
Policy Responses to Coronavirus (COVID-19). Accessed at https://www.oecd.org/
coronavirus/policy-responses/a-debt-standstill-for-the-poorest-countries-how-much-is-
at-stake-462eabd8/.
[9] Pramod, K. M. (2021). COVID-19 Black Swan events and the future of disaster risk
management in India, Progress in Disaster Science Journal, 10th of April Volume.
[10] Putnam, B. (2020). COVID-19’s Influence on Exchange Rates. Chicago Mercantile
Exchange Assessment, Accessed at https://www.cmegroup.com/education/featured-
reports/covid-19s-influence-on-exchange-rates.html#.
Article
Full-text available
The objective of the paper is to analyse and compare the consequences of the coronacrisis on the entrepreneurship of small and medium-sized enterprises (SMEs) in Slovakia and the Czech Republic with the aim of identifying the determinants of changes in entrepreneurship. The secondary empirical research was carried out based on the analysis of secondary and primary data. The analysis used economic indicators of SMEs, governmental measures and surveys of the views of entrepreneurs. The analysis used data from statistical databases and official reports from government institutions and non-governmental organisations (NGOs), as well as data from primary surveys conducted by NGOs. Descriptive statistics, financial analysis and cross-comparison methods were used to process the data. The results revealed changes in the business of SMEs in the Czech Republic and Slovakia during the crisis, such as the adaptation of business strategies, improvement of flexibility and acceleration of digitalisation processes. These changes highlighted the importance of building business agility. The summary of the main changes in SME business based on both secondary data and primary surveys and the perception of state anti-pandemic aid by managers as feedback to governments represent the main contributions of the paper.
Article
Full-text available
This paper is a slightly modified version of the lecture recently delivered by the author. It addresses a question, based on India’s experience, if the current practice of disaster management needs to be revisited in the context of the COVID-19 pandemic that has had an unprecedented impact. The pandemic is being widely described as a Black Swan event, an event that has outsized impact, that is harder to predict and even harder to compute it probabilities. A contrary view is that, in many ways, it is an entirely expected event, given that all the drivers of risk were there in plain sight. In whichever manner we characterise this event, disaster risk management systems as well as public health systems in India and across the world have been challenged and stretched to the limit.While it is too early to draw final conclusions, some early lessons could be drawn. A preliminary analysis suggests five key lessons: 1) Need for more dynamic risk assessment tools, 2) No substitute for community action, 3) Risk is global, resilience is local, 4) From managing risk we need to focus on managing uncertainty, and 5) From managing risk we need to focus on building resilience. There is a need to build our robustness and resilience to risks that may not be known or may not be fully understood yet. Some authors have introduced the concept of “Antifragile: things that gain from disorder.” This paper highlights five pillars of our efforts in this direction: 1) A further strengthened Disaster Risk Management system, particularly at the local level, 2) Resilient Infrastructure, 3) Resilient Financial System with equitable access, 4) Social protection, and 5) Sustainable Natural Resource Management.
The impact of containment measures across sectors and countries during the COVID-19 pandemic
  • N Battistini
  • G Stoevsky
Battistini, N., Stoevsky, G. (2021). The impact of containment measures across sectors and countries during the COVID-19 pandemic. European Central Bank Bulletin, Issue 2/2021.
Assessing Vulnerabilities in Emerging Market Economies
  • T Dahlhaus
  • A Lam
Dahlhaus, T. and Lam, A. (2019). Assessing Vulnerabilities in Emerging Market Economies. Staff Discussion Paper 2018-03, Bank of Canada, Ottawa.
The pandemic will structurally change the global economy more than we think
  • A Garcia-Herrero
Garcia-Herrero, A. (Oct. 2020). The pandemic will structurally change the global economy more than we think. Global Economics & Governance, Bruegel Research Institute. https://www.bruegel.org/2020/10/the-pandemic-will-structurally-change-theglobal-economy-more-than-we-think/.
The political consequences of the COVID pandemic. The Centre for Economic Policy Research Analysis
  • H Herrera
  • M Konradt
Herrera, H., Konradt, M. (2020). The political consequences of the COVID pandemic. The Centre for Economic Policy Research Analysis, London. Accessed at https:// voxeu.org/article/political-consequences-covid-pandemic.
Oil slump scalps Nigeria, Angola, Mexico ratings; Saudi and Russia spared. Reuters media agency
  • M Jones
Jones, M. (2020). Oil slump scalps Nigeria, Angola, Mexico ratings; Saudi and Russia spared. Reuters media agency. Accessed at https://www.reuters.com/article/us-ratingsoil-s-p/oil-slump-scalps-nigeria-angola-mexico-ratings-saudi-and-russia-spared-idUSKBN21D3TS.
A "debt standstill" for the poorest countries: How much is at stake? OECD Policy Responses to Coronavirus (COVID-19)
  • Oecd
OECD (2020). A "debt standstill" for the poorest countries: How much is at stake? OECD Policy Responses to Coronavirus (COVID-19). Accessed at https://www.oecd.org/ coronavirus/policy-responses/a-debt-standstill-for-the-poorest-countries-how-much-isat-stake-462eabd8/.
COVID-19's Influence on Exchange Rates
  • B Putnam
Putnam, B. (2020). COVID-19's Influence on Exchange Rates. Chicago Mercantile Exchange Assessment, Accessed at https://www.cmegroup.com/education/featuredreports/covid-19s-influence-on-exchange-rates.html#.