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“Those who cannot remember the past are condemned to repeat it” George Santayana

The year 2020 will perhaps be noted as a landmark date in the history books of this century, not only because of the devastating economic effects of the current pandemic, which has brought a decade of growth to a halt, but also because of the new economic regime that is now taking seed.

Indeed, the unprecedented response by governments and central banks to the COVID-19 crisis represents a break with the policy mix that we have known over the past few decades. In this terra incognita, comparisons abound, and we can find points of similarity with the 1930s (the New Deal), the post-war period (the extension of the Providence State), and the 1970s. However, some factors of change had already begun to emerge during the past years.

In the Euro Zone, the doctrine of fiscal austerity had already resulted in a European Commission more incline to accept fiscal expansion, faced with the populist risk and social tensions, as long as it was combined with structural reforms. As of 2013, the International Monetary Fund (IMF) had admitted to having underestimated the recessive effect of austerity. More recently, Emmanuel Macron’s economic strategy in 2017 also marked a change versus the two previous presidencies, with an economic policy focused more on reforms aiming to boost growth than on traditional policies of making budget cuts.

The policy mix had also evolved in the United States, where we can talk more about an acceleration in monetary and fiscal interventionism than a real shift; the Trump administration was never partisan to fiscal austerity and the Federal Reserve initiated a change in regime from its first quantitative easing of 2008, which marks the entry into the monetisation of debt.

Moreover, the rise in inequality had become a topic of concern acknowledged as far away as in Davos and Stockholm, as reflected also in the number of Nobel prizes awarded to economists from this school of thought, after decades of domination of the neoclassical school. “What else does the history of ideas prove, than that the intellectual production changes its character in proportion as material production is changed?” wrote Karl Marx.

The theme of “happy globalisation” has come under growing scepticism in light of the changing climate and social inequality which it contributes to accelerating, and the urgency of the fight to contain global warming was already inspiring reflections about the need for a monetary “Green QE”, or a fiscal “Green New Deal”.

However, the COVID-19 crisis, through the scale of the shock it is generating, the extent of the response it implies, and the lasting consequences on our debt trajectories, is probably the catalyst of an acceleration in a - now more accepted, more clearly defined and aspired to - change of regime. Here again the comparison with the worst recessions of the last century has inspired governments to take unprecedented action in terms of size and in some cases their innovation. There is nevertheless a paradox in this novelty, which brings us to an economic policy regime and school of thought closer to that of the second half of the 20th century, at least at the fiscal level.

 

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_{*Editorial of the Indosuez Global Outlook release of 01/06/2020}