The economic and social consequences of the pandemic: in the face of a calculable recession (I)

Ramón Tamames, Professor of Economic Structure, Jean Monnet Chair of the European Union and member of the Royal Academy of Moral and Political Sciences, presents his vision of the effects of the coronavirus on world economies, in a series of three articles that we summarize below for the Proa Comunicación Blog.

Black Swan

In assessing the impact of the pandemic, we must take into account the high doses of uncertainty surrounding this disease. Because neither the final effect it will have on economic activity nor the counter-cyclical measures that the government, slow to react, will apply are known.

For the moment, we can only compare what has happened with other pandemics in history. The Spanish flu of 1918, with 260,000 deaths, or the AIDS epidemics in the 1980s, or SARS in China in 1983, with a much lower number of deaths. The current one is the biggest pandemic of modern times, of which we do not have enough data because the country of origin, China, is a dictatorship and surely does not share the information completely.

The economist Nouriel Roubini, first to predict the Lehman Brothers crisis in 2008, warned of white swans (unexpected events with impact on the economy) such as China-USA tensions, the Brexit, or tensions in Iran. Margaret Frankin, President and CEO of the CFA Institute, goes further: “The coronavirus is a vivid and dramatic example of the unpredictable things that can happen in the world and their impact on markets

Therefore, the coronavirus can be considered a black swan. Because the effects of massive confinement for months can be unpredictable in a world of 7.8 billion people,

China as a reference

Taking into account what happened in China, where the virus was found, the mortality rate of the pandemic is higher as the ages of the patients are higher: 9.6% septuagenarians, 16.6% octogenarians, 19% nonagenarians.

And from the macroeconomic point of view, China came from a phase of deceleration that placed the forecasts of a rise in GDP at just under 6%. The OECD forecasts point to a drop of half a point in overall growth, to 2.4%.

China’s leading role in the intensity of the crisis has led the OECD to revise its own estimate. It now estimates the impact at four times the impact of SARS in 2003. Since this year, China’s weight in global GDP has risen from 5 percent to almost 20 percent.

Other impacts on the economy

Professor Tamames reviews other effects of the coronavirus from an economic point of view. First, the price of gold, which rose from a level of 1,200 euros in 2016, per troy ounce (from 31.1 grams), to 1,518 euros on March 15, 2020, a rise of 26.5 percent. Mistrust of the future, and the fall in stock markets, make gold a refuge, as the economist J.M. Keynes predicted.

The second, a more intense decline in the Spanish economy.  Since 2018, the level of family savings measured in volume of deposits in banks, went from 2.14 trillion euros in 2016 to 2.29 trillion in 2019. 150 billion more, which reflects a fact: the lower consumption and investment responds to citizens’ fear of rising unemployment due to the fall of the economy, so they are gathering monetary resources.

And finally, the drop in crude oil prices by more than 50% since January 2020, from around 65 euros/barrel, to just 33 dollars per barrel of Brent. This fall was partly due to Russia’s conflict with OPEC, and the increase in cheap production from Saudi Arabia to eliminate competitors.

Tamames’ conclusion is that “the figures for the fall in GDP as a result of the pandemic, globally, could be staggering, difficult to imagine”. One example is what happened in Japan, which has seen its GDP fall in the first quarter of 2020 by 2.7%, a rate difficult to recover in the rest of the year.


Given the scale of the problem, Tamames lists the reactions of political and economic leaders. Thus, he appreciates the meeting between Pedro Sánchez and the president of the OECD, Ángel Gurría, who is in favour of measures to protect employment, provide liquidity to SMEs, and make Brussels more flexible with deficit targets.

The president of the ECB, Christine Lagarde, has moved from initial doubts (“let the EU’s national governments spend their ammunition first”) to realising the real role of the ECB as a driver of recovery, if necessary by launching billion-dollar liquidity injections. Something already perceived by Mario Draghi in 2010, who did “everything necessary to save the euro”, as he stated at the time, and complied.

The International Monetary Fund (IMF), led by Kristalina Giorgeva, announced on 16 March 2020 its willingness to mobilise one billion dollars to combat the pandemic. This money represents its entire lending capacity. The Eurogroup (the 19 European countries with the Euro currency) showed its determination: “We will take any coordinated and decisive political action that is necessary, including fiscal measures, to support growth and employment”.

The G7 promised forcefully but without being specific: “We are committed to doing everything necessary to ensure a strong global response through close cooperation and enhanced coordination of our efforts”. That is, fiscal and monetary stimuli, but without specifying how much. The markets are demanding less talk and more action, according to Tamames.

Ramon Tamames

Professor of Economic Structure

EU Jean Monnet Chair

From the Royal Academy of Moral and Political Sciences