Federal Reserve Board Building in Washington © federalreserve.gov
The most international crisis of history, the Covid-19, has so far officially taken 171,000 lives, and has officially contaminated over 2.5 million people on the planet as I am writing. The numbers go up every hour. Like an invisible fire-breathing dragon with humongous wings as wide as the whole earth reaching from East to West, it hovers upon our heads, and we, unitedly confined, no matter who and where we are, rich or poor, black or white, homogeneously wonder: What is next?
The world as we have known it is over. If we, optimistically, translate this peculiar event to a “Reset all” button and disregard the severe economic damages, the shock and the recession on short term, we may also expect gains in humanity, solidarity and global responsibility, more innovation, a deeper care for animals and nature, and a return to the essential human values in the post-Corona era.
All we can do now is pray for recovery. The recovery can be a V- shape (the most common shape of recession recovery for developed economies), or U-shape, W-shape or L-shape, with our preference going for the first one, depending on how long the crisis is going to last and the probability of the freeze of the real economy. While some analysts argue that a “U” will be the most plausible shape to expect, others argue that we might have to come up with a new letter to illustrate the post-covid19 recovery, given the oddity of the phenomena.
The beginning of the 21st century the world saw the first signs of what later was called “The global power shift from West to East”. The term LDCs (Less Developed Countries) was upgraded to the “Emerging Markets” by the World Bank economist Antoine Van Agtmael in 1981, and became the new interesting asset-class for the investors willing to take risks in exchange for performance. The Emerging Market Hedge Fund capital reached 239bln$ in 2019, with the BRICs (Brazil, Russia, India and China) leading the trends. In 2019 the return on the Emerging Markets equities amounted to 18.2%, and 14.3% on debt. Earlier this year the IMF (International Monetary Fund) had forecasted the 2020 economic growth for the Emerging Markets at 4.4%, versus 2% for the US and 1.8% for Europe.
However as the political scientist Ian Brammer puts it, an emerging market is “a country where politics matters at least as much as economics to the markets”. Just when the market was under the impression that the US-China trade war was about to settle, a pangolin came and took everything back to the point zero, opening the gate to an undeclared cold war.
Ian Brammer © brammer.co.uk
While Beijing is capitalizing on its victory against the virus to promote its political system, the West points the finger to Beijing more and more for its lack of transparency on the deathly disease and not informing the World Health Organization on time, silencing the whistleblowers and sugarcoating the excess death numbers. For info currently China is on the 9th position of the table with 4,632 deaths reported behind the USA, Spain, Italy, France, Germany, Turkey and Iran. Born from this attitude is a true Chinese distrust that is about to change the game in international geopolitics.
After soured international relations, the first shift likely to occur on the long term will be in China’s power engine, its manufacturing. With the supply chains being in China almost the entire world is at the mercy of the Chinese factories for masks and white coats, and all of a sudden the idea of manufacturing independence has woken up in the Western collective consciousness. The blue collars hopes and dreams of finding employment and security on the European soil again may come true at some point thanks to the Coronavirus. On the other hand the sovereignty and national borders – arguments behind the populist moves like Brexit - will force the European leaders to come up with a new innovative structure for Europe. The European leaders’ imminent video meeting on the 23rd of April may very well take the Eurozone a step closer to a debt mutualising entity, and therefore consequently also a step closer to a true European Block if the European leaders manage to take the opportunity.
However China will not be destitute of its status of the factory of the world before some serious power struggle – a move that will involve discrediting the West. The Chinese communist party has already accused the US intelligence services of having engineered and brought the bioweapon virus to Wuhan, and mostly putting the accent on the comparison of powers of the two states by saying the US has been slow in handling the pandemic while China built two hospitals in just ten days.
A Chinese medical worker at the hospital performs a nucleic acid test on a biosafety kit. © Wang Jing China Daily
The US says the same false allegations were also made by the Russian trolls on various social media, and the EU’s foreign policy arm, the European External Action Service reported 150 cases of pro-Kremlin disinformation on COVID-19 circulating on the internet between January and March. Russia – China’s top partner- denies the allegations.
In the meantime the aid kits sent by Beijing and Moscow to countries like Italy, Venezuela, Iran, Mongolia and North Korea, were not seen by the West as pure philanthropy but rather a move to influence and expand their political agenda. “Of those Russian supplies, 80 percent were completely useless or of little use to Italy. In other words, the delivery was more like a pretext,” an Italian government official told the leading newspaper La Stampa.
While Russia has closed its borders with China, there were some reports of the Russian discriminatory treatment of the Chinese residents in Russia. The reports are dismissed by the Chinese Communist Party as rumors, as in the greater scheme of things the both economies are counting on each other more than ever, especially in their joint struggle in degrowing the USA as the world leader.
India at the other side of the spectrum has a different stand on things. The pandemic came right when China and India were about to celebrate their 70 years of Sino-Indian diplomatic relationship by undertaking 70 different joint projects in the years to come. However once more given Beijing’s role in the pandemic that is going to result directly in a serious economic crisis for India, the odds are strong that the celebrations will be limited to not more than a few congratulatory formulations.
At the other side of the planet, the populist Brazilian leader Jair Bolsonaro claimed that the Coronavirus concerns are overblown, and that Brazil will stay committed to its biggest trade partner – China – in combating the virus. But a little while later the president’s son, Eduardo Bolsonaro, an influential politician and Brazil’s de facto foreign minister, also a friend of Steve Banon, enraged Beijing by a tweet saying “It’s China’s fault”. A bloody exchange between the president’s son’s entourage and Beijing’s officials was ongoing on Twitter for some days.
Last but not least the Coronavirus also seems to have put an end to the honeymoon of China and Africa. The rise of the Chinese influence and money in Africa in recent years – investment against infrastructure and resources – had already raised concerns over the continent’s overdependence on the Chinese lending. Between 2018 and 2020 the Chinese government and the China Development Bank lent more than $150 billion to Africa, overtaking the World Bank as the biggest single lender to Africa. Taking Angola as an example, the second oil producer of Africa and heavily reliant on oil (90% of exports), with a fiscal deficit of 7% of the GDP and a debt representing 64% of its GDP, one can also guess where the Angolan oil revenues go to and the catastrophe scenario for Angola if the oil collapses. As an Angolan newspaper put it several years ago, every Angolan owes $745 to China, China being Angola’s biggest creditor after Israel. Furthermore Djibouti’s debt to China is $1.2 billion, nearly equal to its annual economic output. Some 55% of Kenya’s debt also belongs to China, it seems that Beijing was playing on a new neocolonial field.
However the recent reports and anger over the treatment of the African citizens living in China in the middle of Pandemic – pulling out random African men out of their homes to undergo mandatory covid-19 tests and quarantining them in isolation – has led to a rare diplomatic clash between Beijing and African leaders. Also contrary to G-20 endorsement, China seemed reluctant to suspend Africa’s debt payments temporarily (until the end of the year) amid the pandemic, a move that frustrated the African leaders and their voters. Diminishing dependence on China seems to be a popular quote to gain voters in Africa these days.
On the other hand as the African economy is likely to be hit quite hard, as long as the need for cash persists there will be ongoing relations with lenders.
Federal Open Market Committee Chair Jerome Powell answers a reporter’s question at the March 3, 2020 press conference © federalreserve.gov
Federal Reserve Board Building in Washington © federalreserve.gov
Given the turmoil it is not surprising that the entire logic of emerging-market investing has gone into reverse. Within 53 days between January to March some 55 billion Dollars have flowed out of the stocks and bonds of the BRICs, the MSCI Emerging Markets Index is down almost a quarter this year. Since the Covid-19 crisis the European investors’ profiles are getting conservative if not orthodox, with capital fleeing into the safe havens like dollar (dollar debt is getting more and more expensive), with innovation and money (the 2 trillion stimulus package issued by the US) being the only exit windows out of this crisis for now.
Amid the crisis, the USA is scheduled to elect a new president in November, and while the current one is using his every recent media intervention as a campaign meeting, one should not forget that Donald Trump was the first politician who initiated the trade war with China. Whether he will be reaping the fruits from the current climate for his campaign will depend on how he will be judged on his crisis management performance. According to the most recent Harvard CAPS/Harris Poll Trump’s approval rating is at 49 percent, the highest since March 2017, and the top two issues on the minds of voters – economy and Corona – seem to be scoring well with 56 percent of voters approving of Trump’s grip of the economy and 51 percent supporting his handling of the coronavirus.
Is the Coronavirus paving the way for “America First”?
The odds are strong, but still a lot can change in the coming months.
The world as we have known it is over, and no wall and no borders will be able to block what is about to come. Welcome to the new world.
By Vianne Savoli
Click here to read the 2020 May edition of Europe Diplomatic Magazine