The 2007-08 financial crisis wreaked havoc on the lives of millions of people across the globe, and upended the faith of many in the prevailing economic system, with many countries still recovering a decade on.

Drawing on extensive research in his new book, Narrative Economics: How Stories Go Viral and Drive Major Economic Events, Professor Shiller will draw on a rich array of historical examples and data and outline a new way to think about economic change, and the narratives that shape it, to provide answers to questions such as whether lessons have been learned since the last financial crisis, are the same dislocations likely to occur again and what toolkits, if any, are there for anticipating the next financial crisis or recession?

Attendance at this event is by invitation only.

As the chair of the Royal Institute of International Affairs, I recently hosted an offsite event with some of the organization’s strongest supporters, research staff, and other leaders. I left with a clearer view of three of the biggest issues of our time: slowing productivity growth, anti-establishment politics, and the rise of China.

Summary

• Multilateralism may, in theory, put countries on an equal economic footing. But in practice the concept has often relied on an anchor government to create and preserve global norms. Under the presidency of Donald Trump, the US has accelerated its move away from leadership in global economic governance. This shift threatens the monetary and trading systems that have long underpinned globalization. Does the global economy need – and can it find – another leader to take America’s place?
• In the monetary sphere, the US role in providing an internationalized currency has endured relatively well, even though the US’s formal anchoring of the global exchange rate system collapsed nearly half a century ago. Governance of the US dollar and of the dollar-based financial system has largely been left to competent technocrats.
• Recent US political uncertainty has encouraged other governments, particularly in the eurozone and China, in their long-standing quest to supplant the dollar. But these economies’ internal weaknesses have prevented their respective currencies from playing a wider role. Arguments for a multipolar system exist, yet network effects plus the dollar’s superior institutions mean it has retained its dominance.
• In trade, the US role as anchor of the global legal order was already looking unreliable before Trump’s election. Washington has faced growing resistance at home to its global responsibilities. This, together with the idiosyncratic rise of countries such as China, has made the US an increasingly unreliable and narrowly transactional leader.
• More recently, hard-to-regulate issues such as foreign direct investment, technology transfer and data flows, often with national security implications, are increasingly undermining the ideal of multilateral global governance. Institutions such as the World Trade Organization, focused on cross-border trade in goods and services, are becoming less relevant.
• Recent US actions against the Chinese technology firm Huawei show the Trump administration’s willingness to decouple the US market from China and try to drag other economies with it. As far as possible, other governments should resist taking sides. A complete separation of the global economy into rival spheres is probably unfeasible, and certainly highly undesirable.
• Although future US administrations may be less wantonly destructive, it is not realistic to expect them to resume America’s former role. Nor can the US simply be replaced with another power. Instead, coalitions of governments with interests in international rules-based orders will need to form. These coalitions will need to show due deference to issues like investment and national security, especially where attempts to bind governments by multilateral rules are likely to provoke a severe backlash from domestic constituencies.

John Maynard Keynes' The Economic Consequences of the Peace has long been a key reference point in discussions about the Treaty of Versailles and its impact on Germany and Europe’s rehabilitation. A century after its publication, the relevance of Keynes’ thinking – not least the influence it had on public perception of the treaty itself – offers an insight into the impact of expert analysis on how political decisions are received in public and academic spheres.

This panel discusses the author, the book and the controversy they have generated up to the present day. How relevant is Keynes’ polemic and how applicable is his European economic recovery plan to our current period of global dislocation? What is the role of experts in the formation and scrutiny of international politics? And how can contemporary politicians use Keynes’ comprehensive assessment of the intersection between political, social and economic realities and national idealism to inform their approaches to international relations?

Economic containment has garnered repeated attention in the discourse about the United States' response to China. Yet, the attributes of economic containment as a distinct strategy of Great Power competition remain unclear. Moreover, the conditions under which a leading power can employ economic containment against a challenging power remain theoretically unelaborated. This article first suggests that economic containment refers to the use of economic policies to weaken the targeted state's material capacity to start military aggression, rather than to influence the competitor's behaviour over a specific issue. Then, this article suggests that economic containment becomes a viable option when the leading power has the ability to inflict more losses on the challenging power through economic restrictions, and this ability is largely determined by the availability of alternative economic partners. When the leading power cannot effectively inflict more losses on the challenging power due to the presence of alternative economic partners, it is better off avoiding economic containment. The author substantiates these arguments through case-studies of the United States' responses to the Soviet Union during the Cold War. The article concludes by examining the nature of the United States' recent economic restrictions against China.

The entry into force of the African Continental Free Trade Area (AfCFTA) on 30 May, after only three years of negotiations, is an economic, political and diplomatic milestone for the African Union (AU) and its member states, crucial for economic growth, job creation, and making Africa a meaningful player in international trade. But the continent will have to work together to ensure that the potential benefits are fully realized.

A necessary innovation

With its advances in maintaining peace and security, abundant natural resources, high growth rates, improved linkages to global supply chains and a youthful population, Africa is emerging as a new global centre of economic growth, increasingly sought after as a partner by the world’s biggest economies. Governments from across Africa have been taking a more assertive role in international markets, including through proactive diversification of trading partners, and the continent remains a strong advocate for the multilateral trading system.

However, this is not yet reflected in outcomes. The African Union does not have observer status at the World Trade Organization, despite diplomatic efforts in the past decade. Africa has less than a three per cent share of global trade, and the growing trend towards protectionism across the global economy may only increase the vulnerability of a disunited Africa. Its fractured internal market means that trade within Africa is lower than for any other region on the globe, with intra-African trade just 18 per cent of overall exports, as compared to 70 per cent in Europe.

The AfCFTA is the continent’s tool to address the disparity between Africa’s growing economic significance and its peripheral place in the global trade system, to build a bridge between present fragmentation and future prosperity. It is an ambitious, comprehensive agreement covering trade in goods, services, investment, intellectual property rights and competition policy. It has been signed by all of Africa’s states with the exception of Eritrea.

It is the AU's Agenda 2063 flagship project, brought about by the decisions taken at the January 2012 African Union Summit to boost intra-African trade and to fast track the establishment of the Continental Free Trade Area. It builds upon ambitions enshrined in successive agreements including the Lagos Plan of Action and the Abuja Treaty. Access to new regional markets and reduced non-tariff barriers are intended to help companies scale up, driving job creation and poverty reduction, as well as attracting inward investment to even Africa’s smaller economies.

The signing in 2018 of the instruments governing the Single Air Transport Market and the Protocol on Free Movement of Persons, Right of Residence and Right of Establishment provided another step towards the gradual elimination of barriers to the movement of goods, services and people within the continent.

Tests to come

However, while progress is being made towards the ratification of the AfCFTA, much remains to be done before African countries can fully trade under its terms. The framework for implementation is still under development, and the creation of enabling infrastructure that is critical for connectivity will take time to develop and requires extensive investment.

So, the first test for the AfCFTA will be the level to which Africa’s leaders make it a domestic priority, and whether a consensus can be maintained across the AU’s member states as the costs of implementation become clear.

There is no guarantee that the gains of free trade will be evenly distributed. They will mainly depend on the extent to which countries embrace industrialization, liberalization of their markets and opening of their borders for free movement of goods and people – policies that some incumbent leaders may be reluctant to implement. Political will to maintain a unified negotiating position with diverse stakeholders, including the private sector, will come under increasing stress.  

A second challenge is how the AfCFTA relates to already existing trade arrangements, notably with the EU.  The AU has long preferred to pursue a continent-to-continent trading arrangement instead of the bilateral Economic Partnership Agreements being sought by the EU under the African, Caribbean and Pacific (ACP) framework to which, with the exception of Algeria, Egypt, Libya, Morocco, Tunisia and South Africa, all African states belong. The signing of the AfCFTA is one important step towards making this possible.

But there are currently negotiations under the ACP to replace the Cotonou Accord (the framework governing trade between ACP members and the EU, including Economic Partnership Agreements [EPAs], that is due to expire in 2020). Negotiations on the African pillar of the accord are due to take place after the AfCFTA has entered into force. So African states and the AU will face the challenge of balancing their commitment to the ACP bloc with pursuing their own interests.

And though the AfCFTA should supersede any other agreements, the EPAs or their successors, will continue to govern day-to-day trading, in parallel to the new pan-African market. It is not yet clear how these contradictions will be reconciled.

A new role for the AU?

The AU will need to play an active role as the main interlocutor with Africa´s international trading partners, with the AfCFTA secretariat being the arbiter of internal tensions and trade disputes. The AU´s engagement at continental level has to date revolved mainly around headline political diplomacy, security and peacekeeping. With the continental free market becoming a reality, an effective pivot to economic diplomacy will be critical for growth and development.

With the AfCFTA, the AU has endeavoured to address Africa’s unsustainable position in global trade, to stimulate growth, economic diversification and jobs for its growing population. Much will depend on the commitment of African leaders to maintaining a unified negotiating position to implement the agreement and the AU’s capacity to effectively move from political to economic diplomacy.

Ample evidence exists that China was caught off guard by the Trump administration's onslaught of punishing acts—the trade war being a prime, but far from the only, example. This article, in addition to contextualizing their earlier optimism about the relations with the United States under President Trump, examines why Chinese leaders and analysts were surprised by the turn of events. It argues that three main factors contributed to the lapse of judgment. First, Chinese officials and analysts grossly misunderstood Donald Trump the individual. By overemphasizing his pragmatism while downplaying his unpredictability, they ended up underprepared for the policies he unleashed. Second, some ingrained Chinese beliefs, manifested in the analogies of the pendulum swing and the ‘bickering couple’, as well as the narrative of the ‘ballast’, lulled officials and scholars into undue optimism about the stability of the broader relationship. Third, analytical and methodological problems as well as political considerations prevented them from fully grasping the strategic shift against China in the US.

The measures taken to limit the spread of the coronavirus - in particular social distancing -  come with significant economic costs, as the drop both in demand for goods and services and in supply due to workers being at home sick will create a short-term economic shock not seen in modern times.

Sectors that are usually less affected by regular economic swings such as transport and tourism are being confronted with an almost total collapse in demand. In the airline sector, companies are warning they might only be able to hold out for a few months more.

Building on the calls to provide income support to all citizens and shore up businesses, European leaders should now be giving explicit permission to the European Central Bank (ECB) to provide whatever financial support is needed.

Although political leaders have responded to the economic threat, the measures announced across the continent have mainly been to support businesses. The crisis is broader and deeper than the current response.

Support for weaker governments

The ECB already reacted to COVID-19 by announcing measures to support the banking system, which is important to guarantee the continuity of the European financial system and to ensure financially weaker European governments do not have to confront a failing banking system as well.

Although government-subsidised reduced working hours and sick pay are a solution for many businesses and workers, crucially they are not for those working on temporary contracts or the self-employed. They need direct income support.

This might come down to instituting something that looks like a universal basic income (UBI), and ensuring money keeps flowing through the economy as much as possible to help avoid a cascade of defaults and significant long-term damage.

But while this is likely to be the most effective remedy to limit the medium-term impact on the economy, it is particularly costly. Just as an indication, total compensation of employees was on average around €470bn per month in the eurozone last year.

Attempting to target payments using existing welfare payment channels would reduce costs, but is difficult to implement and runs the risk of many households and businesses in need missing out.

The increase in spending and lost revenue associated with these support measures dwarf the fiscal response to the 2008-09 financial crisis. The eurozone economy could contract by close to 10% this year and budget deficits are likely be in double digits throughout the bloc.

The European Commission has already stated member states are free to spend whatever is necessary to combat the crisis, which is not surprising given the Stability and Growth Pact - which includes the fiscal rules - allows for such eventualities.

Several eurozone countries do probably have the fiscal space to deal with this. Countries such as Germany and the Netherlands have run several years of balanced budgets recently and significantly decreased their debt levels. For countries such as Italy, and even France, it is a different story and the combination of much higher spending and a collapse in tax revenue is more likely to lead to questions in the market over the sustainability of their debt levels. In order to avoid this, the Covid-19 response must be financed collectively.

The Eurogroup could decide to use the European Stability Mechanism (ESM) to provide states with the funds, while suitably ditching the political conditionality that came with previous bailout. But the ESM currently has €410bn in remaining lending capacity, which is unlikely to be enough and difficult to rapidly increase.

So this leaves the ECB to pick up the tab of national governments’ increase in spending, as the only institution with effectively unlimited monetary firepower. But a collective EU response is complicated by the common currency, and particularly by the role of the ECB.

The ECB can’t just do whatever it likes and is limited more than other major central banks in its room for manoeuvre. It does have a programme to buy government bonds but this relies on countries agreeing to a rescue programme within the context of the ESM, with all the resulting political difficulties.

There are two main ways that the ECB could finance the response to the crisis. First, it could buy up more or all bonds issued by the member states. A first step in this direction would be to scrap the limits on the bonds it can buy. Through self-imposed rules, the ECB can only buy up to a third of every country’s outstanding public debt. There are good reasons for this in normal times, but these are not normal times. With the political blessing of the European Council, the Eurosystem of central banks could then start buying bonds issued by governments to finance whatever expenditure they deem necessary to combat the crisis.

Secondly, essentially give governments an overdraft with the ECB or the national central banks. Although a central bank lending directly to governments is outlawed by the European treaties, the COVID-19 crisis means these rules should be temporarily suspended by the European Council.

Back in 2012, the then president of the ECB, Mario Draghi, proclaimed the ECB would do whatever it takes, within its mandate, to save the euro, which was widely seen as a crucial step towards solving the eurozone crisis. The time is now right for eurozone political leaders to explicitly tell the ECB that together they can do whatever it takes to save the eurozone economy through direct support for businesses and households.

In the last 100 years, global economic crises from the Great Depression of the 1930s to the 2008 financial crash have contributed to significant political changes in Europe, often leading to a rise in popularity for extremist parties and politics. As Europe contends with a perceived crisis of democracy - now compounded by the varied responses to the coronavirus outbreak - how should we understand the relationship between externally-driven economic crises, political upheaval and democracy?

The panellists will consider the parallels between the political responses to some of the greatest economic crises Europe has experienced in the last century. Given that economic crises often transcend borders, why does political disruption vary between democracies? What can history tell us about the potential political impact of the unfolding COVID-19-related economic crisis? And will the unprecedented financial interventions by governments across Europe fundamentally change the expectations citizens have of the role government should play in their lives?

This event is based on a recent article in The World Today by Hans Kundnani and Pepijn Bergsen who are both researchers in Chatham House's Europe Programme. 'Crawling from the Wreckage' is the first in a series of articles that look at key themes in European political discourse from the last century. You can read the article here. 

This event is open to Chatham House Members. Not a member? Find out more.

There were several notable achievements during last week’s Spring meetings. The Fund’s frank set of forecasts for world GDP growth are a grim but valuable reminder of the scale of the crisis we are facing, and the Fund’s richer members will finance a temporary suspension on payments to the IMF for 29 very poor countries.

Most importantly, a boost to the Fund’s main emergency facilities - the Rapid Credit Facility and the Rapid Financing Instrument - now makes $100bn of proper relief available to a wide range of countries. But the core problem is that the vast bulk of the Fund’s firepower is effectively inert.

This is because of the idea of 'conditionality', which underpins almost all of the IMF’s lending relationships with member states. Under normal circumstances, when the IMF is the last-resort lender to a country, it insists that the borrowing government tighten its belt and exercise restraint in public spending.

This helps to achieve three objectives. One is to stabilise the public debt burden, to ensure that the resources made available are not wasted. The second is to limit the whole economy’s need for foreign exchange, a shortage of which had prompted a country to seek IMF help in the first place. And the third is to ensure that the IMF can get repaid.

Role within the international monetary system

Since the IMF does not take any physical collateral from countries to whom it is lending, the belt-tightening helps to act as a kind of collateral for the IMF. It helps to maximise the probability that the IMF does not suffer losses on its own loan portfolio — losses that would have bad consequences for the Fund’s role within the international monetary system.

This is a perfectly respectable goal. Walter Bagehot, the legendary editor of The Economist, established modern conventional wisdom about managing panics. Relying on a medical metaphor that feels oddly relevant today, he said that a panic 'is a species of neuralgia, and according to the rules of science you must not starve it.' 

Managing a panic, therefore, requires lending to stricken borrowers 'whenever the security is good', as Bagehot put it. The IMF has had to invent its own form of collateral, and conditionality is the result. The problem, though, is that belt-tightening is a completely inappropriate approach to managing the current crisis.

Countries are stricken not because they have indulged in any irresponsible spending sprees that led to a shortage of foreign exchange, but because of a virus beyond their control. Indeed, it would seem almost grotesque for the Fund to ask countries to cut spending at a time when, if anything, more spending is needed to stop people dying or from falling into a permanent trap of unemployment.

The obvious solution to this problem would be to increase the amount of money that any country can access from the Fund’s emergency facilities well beyond the $100bn now available. But that kind of solution would quickly run up against the IMF’s collateral problem.

The more the IMF makes available as 'true' emergency financing with few or no strings attached, the more it begins to undermine the quality of its loan portfolio. And if the IMF’s senior creditor status is undermined, then an important building block of the international monetary system would be at risk.

One way out of this might have been an emergency allocation of Special Drawing Rights, a tool last used in 2009. This would credit member countries’ accounts with new, unconditional liquidity that could be exchanged for the five currencies that underpin the SDR: the dollar, the yen, the euro, sterling and the renminbi. That will not be happening, though, since the US is firmly opposed, for reasons bad and good.

So in the end the IMF and its shareholders face a huge problem. It either lends more money on easy terms without the 'collateral' of conditionality, at the expense of undermining its own balance sheet - or it remains, in systemic terms, on the sidelines of this crisis.

And since the legacy of this crisis will be some eye-watering increases in the public debt burdens of many emerging economies, the IMF’s struggle to find a way to administer its medicine will certainly outlive this round of the coronavirus outbreak.

This article is a version of a piece which was originally published in the Financial Times