Debt defaults precipitated by rising interest rates could precipitate a financial market panic, which could spread rapidly given the huge debt burdens governments have assumed. These include: ongoing bottlenecks to global vaccination production and distribution, public anti-vaccination sentiments, the emergence of drug resistant strains of the COVID-19 virus and renewed infection surges. But there are several potential downside risks that might lead the global economy to underperform. The world appears slated to return to growth in 2021 albeit on a lower trajectory than was envisioned before the crisis. Those leaders who have discounted the virus altogether have invariably learned that the disease does not follow political diktats. Meanwhile, the capacity to vaccinate populations quickly and to help other countries vaccinate has become a kind of diplomatic currency. Countries that managed to contain the disease have also kept their economies more or less functioning, and this has invariably conferred a degree of strategic advantage. It has sought diplomatic and public relations leverage from its contributions to the global fight against COVID-19. China, for example, has incorporated the fight against COVID-19 into a broader national narrative of its “peaceful rise” and systemic superiority.
Several authoritarian actors have instrumentalised the pandemic partly to discredit democratic governance.
There is clearly an element of systemic competition that has emerged during the current crisis, and this competition has an important strategic dimension. This will remain a compelling challenge for hard-pressed governments over the medium and longer-term. Moreover, it is not yet clear how this mass of debt will ultimately be financed. Prices have indeed begun to rise and interest rates may eventually follow-a trend that would have important negative consequences particularly for highly leveraged developing countries. There are concerns that this could eventually trigger inflation. Massive government spending, however, has generated extraordinary levels of public debt. The United States acted with very large spending packages to sustain demand and maintain income and employment. The European Union, for instance, facilitated joint debt issuance and created conditions for a powerful fiscal response to the crisis. This time, governments have far more swiftly introduced stimulus programmes to counter recessionary forces.
The pandemic is now recognised as having constituted the largest synchronised fall in global GDP in modern history, although its impact was quickly mitigated by governments which were guided by lessons learned from the global financial crisis in 2009. The longer-term consequences of the COVID-19 pandemic for the global economy are coming into focus. This report was adopted by the Economics and Security Committee at the Annual Session of the NATO Parliamentary Assembly in Lisbon.
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