A global perspective on the economic responses to the pandemic

By Tom Reck; Partner, Withum (HLB USA)

The COVID-19 pandemic shook the world with unprecedented force, leading to immediate but varying damage across countries. Unfolding as an economic, social, and health crisis with severe ramifications, it has plunged the world towards a global recession. Four years later, businesses are seeking to evaluate the lasting effects of the pandemic in order to extract valuable lessons for the future.

The "Presumption of Innocence" podcast recorded in association with HLB recently explored the global impact of economic responses to the COVID-19 pandemic, featuring insights from economic analyst Jim Power. Power's expertise provided valuable perspectives on the interconnectedness of economies worldwide and the ripple effects of the United States' economic decisions during crises.

When the US gets a cold, the world gets the flu

The economic significance of the United States as the world's largest economy and a major driver of global economic activity is indisputable. Consequently, swift and aggressive actions taken by US policymakers during the pandemic — including substantial government intervention and monetary stimulus through measures like the CARES Act —had far-reaching consequences beyond the country's borders.

Power reminds us that the US policy response to those extraordinary times was aggressive and multifaceted. The actions taken ranged from swiftly slashing interest rates to zero in March 2020 to introducing quantitative easing and lending programs aimed at bolstering various sectors of the economy, such as households, businesses, financial markets, and state and local governments. Additionally, there were significant purchases of US government debt and mortgage-backed securities.

This swift and decisive action was yet another example of the contrasting approaches of US and European authorities in responding to economic crises, a pattern that has been observed since the 2008 financial crisis. US policymakers typically opt for proactive and decisive monetary and fiscal measures, whereas European authorities, especially the European Central Bank, tend to adopt a more cautious approach.

Inflation spikes

The unprecedented economic stimulus measures, like the CARES Act in the US, aimed at alleviating the pandemic's economic impact, raise concerns about the potential long-term effects, including inflation and economic imbalances.

Power notes that the build-up of these pressures commenced well before the pandemic hit. In the lead-up to the onset of COVID-19, the global financial and monetary system, predominantly influenced by the United States, has already displayed significant distortions, as a prolonged state of low interest rates and excessive money supply tend to lead to asset bubbles and increased risk-taking behaviour.

Reflecting on these events, Power echoes the concerns of renowned economists like Milton Friedman, emphasising the importance of caution in managing economic stimulus measures.

"And of course, Friedman would have predicted, were he alive, that the policy response from the US, particularly after 2007, 2008, would inevitably give rise to an inflationary spike at some stage. So, that was the sort of very unusual artificial backdrop in the run-up to March 2020," Power  concludes.

Challenges in Europe

Recognising the importance of policy coordination, Power emphasises the need for what is often termed a "whole-of-government response" during times of crisis. Faced with the devastating effects of the pandemic, European governments implemented tax deferrals for businesses, financial support for households, and various lending programs to maintain economic stability.

While European authorities also acted swiftly, the decision-making process was inherently more complex due to the involvement of multiple member states, reflecting the region’s ongoing challenges in achieving unity due to differences in national interests and priorities among member states.

The pandemic was not the first crisis to reveal this. Reflecting on the 2008 financial crisis, Power underscores how austerity measures imposed on certain European countries, influenced by powerful members such as Germany, worsened the effects of the financial shock.

Despite the challenges, Power commends the European Central Bank for implementing quantitative easing measures to support liquidity in the banking system and the relaxation of fiscal rules, allowing member countries to increase government spending and run higher budget deficits to address the crisis.

Although these interventions were necessary, they also led to distortions in the economy and instances of fraud.

Enforcement activities

The podcast addressed enforcement actions concerning economic stimulus programs, particularly in the United States, where current investigations into potential fraud and abuse linked to COVID-19 stimulus initiatives could be among the most extensive white-collar criminal probes in US history.

Again, these differences in enforcement underscore the divergent political and economic strategies between the United States and Europe. In the US, there's a drive for more aggressive investigations, whereas in Europe, the focus lies on businesses voluntarily returning funds they are required to.

Future challenges

Looking ahead, Power highlighted potential future challenges and economic consequences of geopolitical events such as elections and conflicts in regions like Ukraine and the Middle East. "So, 2024 is all about elections. It's all about politics. And the backdrop to those elections is a very, very unstable global geopolitical system," he remarks, suggesting that policymakers may resort to familiar measures such as quantitative easing and interest rate cuts to address economic threats.

He also highlights the differences in current economic conditions between the US and Europe. "Because the European response to COVID was less aggressive -- it was aggressive by European standards, but much less aggressive than the US approach -- and the European economy has underperformed as a consequence of that. So, in Europe at the moment, the real issues that have been debated at an economic level are the lack of economic growth, particularly in Germany," he concludes.

Power's insights provided valuable context for understanding the complexities of the global economy and the challenges facing policymakers in navigating uncertain times. To hear more, visit The "Presumption of Innocence" podcast.

How HLB can help you navigate a post-pandemic economic climate

The business environment after the pandemic has brought unprecedented challenges. Organisations need a reliable partner to safeguard and guide their businesses in these uncertain times. HLB provides expert guidance and tailored advice for businesses navigating the post-COVID economic climate. With our Forensic and Investigation services, we aim to ensure the safety and integrity of your operations. Get in touch with the HLB team to learn more about our services.